Buying 50,000 dirt cheap Lloyds shares would give me a £100 monthly income

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Last December I decided that Lloyds (LSE: LLOY) shares were so cheap at 46.93p that I simply had to buy them.

I only bought a small stake, because I didn’t have much cash at the time, having splurged on shares after the FTSE 100 dipped below 7,000 in October. Luckily, I didn’t miss out on much. Today, the share price is slightly lower at 46.05p.

I’ll soon have more cash at my disposal after completing the transfer of a legacy stakeholder pension plan into a self-invested personal pension (Sipp). Should I use it to buy more Lloyds shares?

It’s a top income stock

Lloyds Banking Group is the ideal stock to stick into a SIPP, as I can use its generous dividends to generate income in retirement. Today, it yields 5.2% with plenty of scope for progression as the payout is covered three times by earnings.

The forecast yield is a mighty 6.1%, and that should still be covered 2.7 times. So I should look forward to generating a steadily rising income over time.

As ever, this isn’t guaranteed. In 2018, Lloyds paid a dividend per share of 3.21p. That fell to 1.12p in 2019 and 0.57p during the pandemic in 2020.

It’s on the up now, jumping to 2p in 2021 and 2.4p in 2022. Based on that final figure, I’d need to buy exactly 50,000 Lloyds shares to hit my target income of £100 a month.

At today’s 46.05p, that would cost me a hefty £23,025. Unfortunately, that’s more than I feel comfortable investing. It means trusting a large chunk of my ISA and SIPP portfolio to the fortunes of just one company.

I don’t expect Lloyds to be sunk by the global banking crisis, due to its capital strength and low-risk domestic profile, but it adds to my sense of caution. The UK economy isn’t out of the woods yet, with the Bank of England now expected to hike interest rates as high as 5%.

There are risks and rewards

That could put further pressure on the property market and lead to a rise in debt impairments. On the other hand, it would allow Lloyds to widen its net interest margins, the difference between what it pays savers and charges borrowers.

Higher rates helped Lloyds beat quarterly profit forecasts, with a Q1 pre-tax profit of £2.26bn, up 46%, despite a small rise in arrears. Yet chief financial officer William Chalmers warned margins are likely to fall from 3.22% to 3.05% across 2023.

While the sluggish Lloyds share price is disappointing, it does allow me to buy more stock at a bargain valuation of just 6.3 times earnings.

I’d happily put £5,000 into Lloyds shares at today’s price, once my SIPP transfer is complete. That would give me income of £305 a year based on that 6.1% forecast yield, or just over £25 a month.

That’s just a quarter of my original £100 target but it should rise over time, assuming management keeps lifting its shareholder payouts. Plus I may get some capital growth, if the stock finally rises past 50p and beyond.

As ever with investing, there are no guarantees, but since I plan to hold Lloyds for at least five years, and ideally decades, it has plenty of time to recover.

The post Buying 50,000 dirt cheap Lloyds shares would give me a £100 monthly income appeared first on The Motley Fool UK.

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Harvey Jones has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group 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.

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