So you have a spare £1,000 and want to invest it in the stock market? If you are looking for a long-term buy-and-hold, one that should deliver share price growth and dividend income for years to come, high street giant Lloyds Banking Group (LSE: LLOY) could be the ideal place to start.
Banking puzzle
I am not saying anything radical here. FTSE 100-listed Lloyds has a market cap of £48.73bn and is the most traded stock on the UK market. Before the financial crisis, it was everybody’s favourite dividend income machine. It fell to pieces, of course, but slowly the formula has been reassembled.
Nor am I the only one to name Lloyds as a top dividend play. My Foolish colleague Edward Sheldon recently noted that Lloyds has significant dividend potential as it restores itself to financial and regulatory health.
Nice and slow
Lloyds, like every other bank, got carried away during the banking boom, but now it has returned to the basics of providing small business and retail banking, mostly to the domestic market. It is not going to turn into a racy growth stock at any point and nor should it: investors have had enough of that.
It should now prove the old mantra that slow and steady wins the race. The stock market is about getting rich slowly rather than quickly, and the smoothest way to do that is through share price solidity and a steady, growing dividend. If you reinvest your payouts back into the stock, that will turbo-charge your total returns.
Dividend delight
Lloyds stopped paying dividends for seven whole years after the financial crisis, resuming only in 2015. Today it yields 3.89%, in line with the FTSE 100 average of just under 4%. Soon it should start streaking ahead, with the yield forecast to hit a juicy 6.1% shortly.
By the end of the 2018 financial year, City analysts reckon it could hit 6.7%, then 7.3% the year after. The sooner you lock into this growing income stream, the more stock your re-invested dividends will purchase.
You may have noticed the Lloyds share price has slipped lately. It trades 10% lower than three years ago, against a return of 18% from a FTSE 100 tracker. However, I believe Lloyds is set to play catch-up as its restructuring bears fruit and the threat of conduct charges fades. It was the worst offender in the PPI mis-selling scandal, with provisions topping £18bn, but that episode is now drawing to a close.
Nice price
There will still be bumps on the road. Lloyds’ domestic UK focus could prove a drag if the UK economy continues to suffer from Brexit teething pains. Markets remain volatile: you could part with your £1,000 only to see its value take a hit next day.
However, much of this uncertainty is reflected in its low forecast valuation of just 8.8 times earnings, against the 15 times that usually marks fair value. Its price-to-book ratio is exactly one, another sign of balance. You may start with £1,000, but you should end up with a lot more. Just give it time to grow, and keep reinvesting those dividends.