As the economy recovers from the Great Recession, the banks too have been recovering. Rising profits, and share prices on the up, mean that people are once again seriously considering the banks as long-term investment opportunities.
In fact, we are the approaching the stage where the banks are considered not just as turnaround opportunities but as income investments.
But which bank would you pick as your ideal dividend investment? Today I pit Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) against HSBC (LSE: HSBA) (NYSE: HSBC.US).
Lloyds
Lloyds is one of the country’s leading banks, as well as its top mortgage provider. It was hit particularly hard by the Credit Crunch, and has paid out billions in the PPI mis-selling scandal.
But there is strong evidence that this company’s prospects are on the turn. The crucial point is that impairment charges have been falling, and falling rapidly. As impairment charges tumble, the bank is finally profitable once again. With a resurgent economy and housing market, profits are expected to push ahead in the next few years. Consensus estimates a 2014 P/E ratio of 10.3, falling to 8.8 in 2015.
Since the Crisis, Lloyds has not paid any dividends. But as the business’s capital position improves steadily,with a core Tier 1 ratio now at 11.1%, it is now broaching the prospect of paying a dividend. It is estimated that the 2014 dividend yield will be 2.0%, rising to 4.7% in 2015.
I see Lloyds as both a growth investment and an income investment. I see the growing dividend yield as a sign of increasing confidence in the business, as the banks gradually say goodbye to the years of Credit Crunch, impairments and billion-pound fines.
HSBC
In contrast to Lloyds, HSBC emerged relatively unscathed from the Credit Crunch. But that’s not to say it hasn’t had to pay hefty PPI mis-selling fines. But it has not suffered the billions of pounds of impairment charges that banks such as Lloyds, RBS and Barclays were hit with.
HSBC has been the most ‘boring’ bank in the UK, and that in itself is a significant plus point. What’s more, its size and global reach, from the UK to China and Latin America, mean it is a more stable, if slower moving business.
Why would you invest in one of the world’s largest banks? Well, not to see lightning-fast growth, but to see a safe home for your money, and a regular flow of dividend cheques.
HSBC looks reasonably cheap as well, with a 2014 P/E ratio of 12.2, and a dividend yield of 4.6%, and a 2015 P/E ratio of 11.3, with a dividend yield of 5.0%. This bank produces a consistent and gradually rising yield each year. Thus, in many ways, this is the ideal dividend play.
Foolish bottom line
So which company should you buy? Well it depends what you want, and what type of investor you are. If you are risk averse, and want to invest in a company which is stable and highly cash-generative, then HSBC would be your choice.
But if you want to achieve a higher long-term total return, and are willing to take more risk, I would invest in Lloyds.
As for me personally, I see myself as a higher risk investor, so I have bought into Lloyds.