Dividend stocks have gained in popularity since the 2008 recession, due to the continuation of the low interest rate environment. Investors continue to look at low-yielding bonds and fixed-income investments with limited options to try to find the additional yield in their portfolios they were accustomed to prior to the recession. The low-rate environment has been a boon for stocks, and investors have continued to cozy up to dividend stocks as they seek yield in addition to capital gains.
Of course, not all dividend stocks are equal, and it is important to ensure the underlying company is healthy and appears likely to continue paying the dividend. Ensuring the dividend stock is backed by ample free cash flow is absolutely key because, as an investor, you want to make sure those dividends continue to pay off. Combining dividends with stocks priced under $5 can be a more aggressive strategy for an investor looking for yield in addition to speculative capital gains.
Lloyds Banking Group
Lloyds Banking Group plc (NYSE: LYG) is a large, multinational bank based in the United Kingdom. Lloyds offers retail and commercial banking solutions, insurance, loan services, savings and more. The bank operates under Lloyds Bank, Halifax and Bank of Scotland entities, and was founded in 1695. In early November 2019, the stock was trading around $3 and posted a dividend yield of 7.52%.
The U.K. bank reached a high of $5.60 in 2015 but has since corrected to current levels. However, the stock is still up nearly 5% year to date. While the bank has struggled since being bailed out by the U.K. government, investors are beginning to get excited about Lloyds’ future. Meanwhile, the U.K. government plans to begin divesting its holding in Lloyds Bank around spring 2016.
Lloyds Bank has a price to earnings of 43 and a forward price to earnings of 15.5. While Lloyds is by no means a bargain, the stock has a price to cash of 0.22 and a price to free cash flow of 1.42. Lloyds Bank has an astounding pile of cash on hand at about 21.29 per share, while debt to equity stands at 2.11. Lloyds’s cash flow was not always this impressive, however. Back in 2013, the bank reported negative free cash flow of -18.5 billion GBP. Luckily, it was able to bounce back in 2014 with full-year free cash flow of 6.9 billion GBP. Cash flow is on track to continue growing in 2015.