I’ve been looking back over the last year from an investment perspective, and I’ve been surprised at how much more positive I am about high-yielding shares such as Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) compared to a year ago.
I’ve always tended to favour capital growth over dividends in the past, but with the rise of CPI inflation to 2.9% I’ve found myself focusing to a greater extent on companies which could offer high income returns over the long run.
Lloyds may not be an obvious income choice for many investors. It arguably lacks the stability or resilience of a historically popular income share, although before the financial crisis I remember banks were considered by some investors to be good sources of income.
Today, though, the banking sector is viewed as being relatively risky. I must admit, I think Lloyds faces some key risks in future – some of which have been caused by its renewed focus on the UK.
With the bank now generating around 97% of its income from the UK, I think it could be exposed more than many of its sector peers to the potentially negative effects of higher inflation on consumer spending. This could cause a slowdown in demand for loans and in spending in general.
In spite of this, I think the bank has income appeal. It has a prospective yield of 5.9% for this year and a prospective yield of 6.7% for 2018. I’m really struggling to find too many large-cap stocks which offer dividend yields which are higher than those over the next couple of years. Therefore, in terms of its potential return, I think Lloyds could have investment appeal.
Such a large potential income return helps to allay my worries about the bank’s risks. Although the UK economy may experience difficulties from Brexit, I feel Lloyds has made progress in the quality of its asset base and in its cost to income ratio. Therefore, while its share price could be volatile, I’m upbeat about its income prospects.