At first glance, Lloyds Banking Group (LSE: LLOY) looks like a great stock for passive income.
With the share price just over 59p, the forward-looking dividend yield’s around 5.8% for 2025. Shareholders have enjoyed a good run in 2024, so far.
I think that might have happened because of a general feeling that the economy’s improving.
Struggling with earnings
However, Lloyds is a cyclical business, and a glance at the multi-year financial record reveals a patchy performance for earnings and cash flows.
My fear is that after cycling up, the business may cycle down at some point. After all, City analysts expect a rebound in earnings next year after a weaker period in 2024. However, even after the predicted rise in 2025, earnings will only regain the level first achieved in 2021.
Are earnings actually looking toppy then? It’s possible. But overall, it’s the elevated uncertainty about Lloyds that keeps me away. However, the business and the stock may do well for shareholders over the coming years. If the increasingly benign general economic conditions we are seeing persist, Lloyds could prove to be a decent investment.
For me though, there are better opportunities to pursue. For example, I’m keen on Supermarket Income REIT (LSE: SUPR).
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The company’s a UK-based real estate investment trust focusing on grocery properties — as the name suggests.
It’s not a stock or a business to set the pulse racing, but that’s part of the point. I see the firm as operating in a steady and enduring sector leading to streams of consistent cash flow.
An impressive dividend record
That’s just what’s needed for paying investors steady income via dividends. Indeed, the multi-year record’s impressive here, with the dividend’s compound annual growth rate (CAGR) running at about 34%.
Property investing comes with its own risks, of course. We’ve seen big swings in the value of property over the decades, and in that sense it’s a cyclical sector, which adds a bit more risk for shareholders.
But Supermarket Income REIT performed well through the pandemic and kept up its shareholder payments, unlike many other businesses.
One of the great strengths is that the firm’s tenants operate enterprises with defensive qualities. People need to shop for groceries whatever’s happening to the economy.
In March, the company issued an optimistic outlook statement. Chair Nick Hewson said the UK grocery sector had been demonstrating “strong resilience” to the challenging macroeconomic environment.
The firm’s tenants “continue to grow”, strengthening their financial and operational performance by putting omnichannel supermarkets at the heart of their operations, Hewson said.
We’ll find out more from the company with the full-year earnings release due on 18 September.
In the meantime, with the share price near 75p, the forward-looking dividend yield for 2025’s around 8%. I think that looks attractive and would pile in with deeper research now with a view to owning a few of the shares for my diversified portfolio.
The post I’d shun Lloyds Banking Group and consider this stock for passive income instead appeared first on The Motley Fool UK.
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Kevin Godbold has no position in any of the shares mentioned. 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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