Lloyds Banking Group PLC (LON:LLOY) (LSE:LLOY.L) and Vodafone Group plc (LON:VOD) (LSE:VOD.L) are just two of a surprising number of larger-cap shares which yield over 5%. I’m slightly surprised by this because I had expected dividend shares such as Lloyds and Vodafone to register share price rises in recent months which would compress their dividend yields.
The main reason I thought Lloyds and Vodafone shares could have moved higher is the threat of higher inflation. It’s already at 1.8% and we’re only at the start of the year. I think it could move higher during 2017/18 based on forecasts from various organisations including the Bank of England.
Therefore, I believe Lloyds could become increasingly popular among investors and its share price could rise. I’m impressed with the strategy adopted by Lloyds. It has not only returned the bank to profit. I believe it has also made it a more sustainable entity in the long run, and one which could be able to outperform sector peers during what may be a difficult time for the UK economy.
Lloyds is still targeting a lower cost/income ratio and has the capacity, in my view, to increase dividends per share while at the same time increasing its capital ratios. Lloyds bank shares could also rise because of its relatively low P/E of approximately 10. For me, this is too low given its relatively sound financial position.
It’s a similar story with Vodafone from a dividend perspective. Its dividend yield of 6% is higher than the Lloyds bank dividend yield of 5.4%. For me, Vodafone offers relatively defensive qualities which should provide a consistent dividend in future. I believe its investment in infrastructure and in its product offering could provide it with an improved growth prospects for the long term.
I must admit, when Vodafone sold its interest in Verizon Wireless, I was concerned at its lack of geographical diversification. I felt Vodafone was too reliant on Europe, which was heightened by the acquisitions it made in the EU. Although I’m worried about the economic growth prospects of the EU post-Brexit, I think Vodafone has a strong position within the region and could leverage this to generate higher growth. In my view, this could filter down to higher dividends per share and a rising share price.