Got £2,000 to invest? I’d buy the Lloyds share price and this FTSE 250 dividend stock

Harvey Jones says Lloyds Banking Group plc (LON: LLOY) is a strong income prospect, but this FTSE 250 (INDEXFTSE:UKX) dividend stock is also tempting.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Is now the time for investors to look beyond the big names in banking, such as Lloyds Banking Group (LSE: LLOY), as a host of challenger bank rivals snap at their heels?  Let’s take a look.

Brexit blow 

The Lloyds share price has been repeatedly tipped (including by me) to stage a share price comeback, but it continues to flounder. It’s fallen another 13.5% in the past three months, as Brexit fears bite and concerns grow that the global economy is slowing, which could drive interest rates back down again.

Lloyds still tempts me as it offers an incredibly attractive forecast yield of 6%, covered 2.2 times by earnings. By 2020, City analysts believe that could hit 6.4%. Lloyds is now the dividend machine of yore.

Bargain buy

Today, you can buy it at a forward valuation of just 7.5 times earnings, which puts it deep into bargain territory. A price-to-book value of 0.8 only adds to what looks like an incredibly strong buy case for the £40bn FTSE 100-listed high street banking fixture.

Yet still Lloyds stock falls. Stagnating interest rates make it hard to widen net interest margins and boost profitability, while the slowing global economy threatens a rise in bad debts and impairments.

Boris question

A lot depends on whether new PM Boris Johnson can deliver on his promises, as do so many things. A no-deal Brexit, vote of confidence, or new general election would all menace the UK economy and banking sector. Although that might also be a buying opportunity for contrarian long-term investors.

Edward Sheldon says Lloyds also faces competition from the new breed of challenger banks, as do all the high street monoliths, but he can’t resist that dividend either.

Still life in buy-to-let

One of those challengers is Paragon Banking Group (LSE: PAG). Its stock is up 1.5% today after its trading update for the nine months to 30 June showed “strong new business growth and margin improvements,” in the words of CEO Nigel Terrington. He said the group has delivered in line with expectations and “is well placed to deliver our 2019 objectives.”

The Paragon share price is up 62% over three years, despite stagnating lately, and Brexit won’t have helped here. Today it reported a 20% rise in year-to-date lending to £1.9bn, with continued improvements in net interest margins. Total deposits have now topped £6bn.

Value stock

One problem Paragon has faced down is its focus on buy-to-let, which has been hit hard by the Treasury’s tax crackdown on amateur landlords. Fortunately, the business focuses on the professional market rather than the dwindling private investor sector, and its buy-to-let pipeline climbed 3.2% to £733m. The bank cannot see any signs of deterioration or stress in the credit performance of its loan books, although it’s making precautionary preparations, and maintains a tight risk appetite.

Roland Head admires Paragon’s resilience, noting it has survived several boom and bust cycles since launching in 1985. He also likes its dividend potential, with a forecast yield of 4.7%, covered 2.4 times. Paragon stock is valued at a lowly 8.9 times forecast earnings. So Lloyds isn’t the only potential bargain in the banking sector.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »