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  /  Editor's Pick   /  I’ve just bought Lloyds shares. Next I’m buying this cheap UK stock 

I’ve just bought Lloyds shares. Next I’m buying this cheap UK stock 

Young happy people looking at sparklers in their hands on New Year's Eve

After years of dithering, I finally jumped off the fence and bought Lloyds (LSE: LLOY) shares because I thought at 46p they were too cheap to ignore. There comes a point where you cannot hang around any longer.

I thought Lloyds shares looked like a bargain for a long-term investor like me, as they had fallen by a third over the last five years. That left the UK-focused high street bank trading at just 5.8 times earnings, with a similarly low price-to-book value of 0.5.

I’ve finally bought Lloyds shares!

Like any stock purchase, there were risks to buying Lloyds shares. The recession will no doubt lead to an increase in debt impairments, for example. If interest rates peak sooner than expected, Lloyds may lose the opportunity to widen its net interest margins.

The income swung it for me. Lloyds was viewed as a dividend machine before the financial crisis. After a long journey back to respectability, it is becoming one all over again.

The forecast yield is now 5.7% and cover still looks strong at 2.9 times earnings, giving scope for progression.

Lloyds shares are now safely tucked in my portfolio and I don’t need to pay them much attention for years. I will simply reinvest my dividends for growth, and wait for my stake to roll up in value.

I’m still looking to buy FTSE 100 dividend stocks, though, and insurer Legal & General Group (LSE: LLOY) is now staring at me from my watchlist. This is another top income stock I’ve been watching for donkey’s years, and now I’m more keen than ever.

L&G is already an income machine. Its dividend per share has steadily climbed from 15.35p five years ago to 18.45p in 2021. Management stuck by it during the pandemic, even when rival insurer Aviva suspended its shareholder payouts. Management came under some pressure but stuck to its guns and put loyal investors first.

I’d buy L&G for higher income

L&G now offers a whopping forecast yield of 7.2%, covered 1.7 times by earnings. If I reinvested all my dividends, I’d almost double my money in a decade even if the share price did not move at all. The dividend is forecast to keep climbing to 19.5p in 2022 and 20.9p in 2022, so I’d probably do it even faster.

L&G shares aren’t exactly shooting the lights out, growth-wise. In the last five years, they have fallen 2.5%. Over 12 months, they are down 13.3%. The plus side is that this suggests I am not overpaying for the stock. Especially since it is now trading at just 7.4 times earnings, well below the 15 times that is considered fair value.

L&G expects operating profits to grow 8% this year, with full-year capital generation of £1.8bn. That’s a solid performance. The group is also a major global investor, with around £1.3trn in total assets under management. The balance sheet looks healthy, with an estimated solvency coverage ratio of between 225% and 230%.

Legal & General’s low valuation makes me want to buy it right now, but sadly all my cash is earmarked for Christmas. It may therefore be my first stock purchase of 2023.

The post I’ve just bought Lloyds shares. Next I’m buying this cheap UK stock  appeared first on The Motley Fool UK.

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Harvey Jones holds shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. 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.