Lloyds (LSE: LLOY) shares continue to trade well below their highs, currently selling for as little as 58 pence a share.
Could investing in Lloyds today help build wealth across generations? Let’s discuss.
A cheap share
Lloyds shares look cheap compared to today’s market. This year, analysts expect the bank to generate earnings per share of 6.4p. At the current share price, the price-to-earnings (P/E) ratio is just nine. That’s well below the market average of around 14, so there could be a lot of value here.
At the same time, there is also a decent dividend yield. Lloyds is expected to pay out 3.2 pence per share in 2024. That equates to a yield of around 5.5%, which is higher than the interest offered by most savings accounts.
A bad long-term investment in the past
However, if my goal was to build intergenerational wealth (and it is), I would look beyond Lloyds shares.
One reason for this is that Lloyds does not have a good long-term track record of creating wealth for its investors due to the volatility of its earnings.
Ten years ago, the bank’s share price was 73 pence. Today it is 58 pence. In other words, over the last decade, the company has not provided any capital gains to its investors.
This is very disappointing considering we are currently in a huge global bull market for equities.
Of course, things could be different in the future. But the stock’s track record does not give me confidence.
Given past performance, I would not expect the stocks to deliver high returns in the future, especially now that interest rates are likely to fall (higher rates are generally better for banks).
How I want to build wealth
So how do I try to build wealth for future generations?
Instead of buying cheap stocks, I invest in “high quality” stocks (just like Warren Buffett).
I am looking for companies that:
-
A competitive advantage that gives you an edge over the competition
-
Continuous earnings growth
-
A high level of profitability
-
Strong long-term growth prospects
-
An excellent track record in creating shareholder wealth
History shows that these types of companies tend to be excellent long-term investments and can help build wealth for generations. Just look at Buffett. He’s now worth over $100 million!
A good example of a high-quality company – and one in which Buffett himself has invested – is visa (NYSE:V), which is listed in the US (but can still be bought for an ISA or SIPP).
Its business model (it operates a large global payments network) is not easily replicated. At the same time, it is very profitable and has fantastic long-term growth prospects as the world moves from cash to electronic payments.
Over the last 10 years, the stock price has risen from around $55 to $265. The company has also paid regular dividends, so overall it has been an excellent long-term investment.
Of course, there is no guarantee that the company will continue to be so successful in the future. There is a possibility that the company’s business model will be turned on its head by technology.
However, I am very optimistic about the stock. It is currently one of the top 10 positions in my portfolio.
Readers can find more examples of high-quality stocks like these (including many listed in the UK) here: The Motley Fool.
The post “Could Lloyds shares at 58p help Brits build intergenerational wealth?” appeared first on The Motley Fool UK.
Further reading
Edward Sheldon has positions in Visa. The Motley Fool UK has recommended Lloyds Banking Group Plc and Visa. The views expressed on companies mentioned in this article are those of the author and may therefore 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.
Motley Fool UK 2024
