Having grown tired of watching Lloyds (LSE: LLOY) shares do too little for too long in my view, I sold them recently. As is often the way with these things, the stock almost immediately went up!
There we go. However, I think the share I bought with some of the sale’s proceeds will make me a lot more money over time than Lloyds.
Huge difference in dividend yields
The new stock was global investment manager M&G (LSE: MNG). It receives much less attention from investors than Lloyds, despite generating a much bigger yield. And it was this that clinched it for me.
Lloyds paid a dividend in 2023 of 2.76p a share, which on the current stock price of 55p yields 5%.
M&G’s dividend last year was 19.7p. This gives a yield on its present £2 share price of 9.9%! This is nearly double the Lloyds payout and way over the FTSE 100 average of 3.6%.
Analysts estimate that this enormous gap in returns is likely to continue.
The yield forecasts for Lloyds are 5.1% this year, 5.5% in 2025, and 6.5% in 2026.
Over the same respective years, M&G is set to return 9.9%, 10.3%, and 10.5%.
What does it mean in hard cash terms?
I always use the dividends paid to me to buy more of the shares that paid them — known as ‘dividend compounding’. This produces much bigger returns over time than removing the dividends when they are paid and spending them on something else.
On this basis, £10,000 of Lloyds shares at an average 5% yield would make an extra £6,470 after 10 years.
The same amount in M&G at an average yield of 9.9% would give me an additional £16,803 instead.
After 30 years on the same average yield, Lloyds would have generated an extra £34,677 to add to my £10,000. This would pay £2,234 a year in dividend yield.
M&G by that time would have made £182,559 on top of the initial £10,000. The total investment would pay £19,063 each year in dividend returns.
Therefore, based on yield, I made absolutely the right decision selling Lloyds and buying M&G, I think.
How do the core businesses compare?
All firms have their risks, and these two are no different.
Lloyds faces a falling margin between loans and deposits as UK interest rates continue to drop. It is also looking at potentially huge compensation payouts due to mis-selling of its car insurance.
M&G faces stiff competition in the investment sector from domestic and foreign rivals. It also has a higher debt-to-equity ratio (of 2) than is considered good for its business sector.
However, both companies are predicted to grow healthily to the end of 2026 at least. Analysts estimate Lloyds earnings will increase by 5.1% a year to that point. However, for M&G, the projections are for 18.5% earnings growth each year to then.
For me, this is another distinct advantage in M&G’s shares over Lloyds. Both a company’s share price and its dividend payments are ultimately driven by rising earnings over time.
Overall, given these factors, I think I made the right decision both to sell Lloyds shares and to buy M&G’s. And I would do exactly the same today.
The post Was I right to sell my Lloyds shares and buy some of this overlooked FTSE 100 dividend stock instead? appeared first on The Motley Fool UK.
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Simon Watkins has positions in M&g Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc and M&g Plc. 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.
