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I don’t have unlimited cash reserves that I can use to buy UK shares. So I’m looking for the best cheap FTSE 100 stocks to buy today.
Should I add these two cheap dividend stocks to my investment portfolio?
Lloyds Banking Group
At 5.4%, lloyds bank (LSE:LLOY) shares offer a dividend yield comfortably above the FTSE 100 average of 3.9%. However, despite this, I do not see the business as an attractive way to increase my income.
The profits these companies make depend to a large extent on general economic conditions. Loan defaults can skyrocket, as British banks witnessed last year (credit impairments at Lloyds soared to £1.5bn in 2022). It can also be a fierce fight to increase income in difficult times.
The problem for this particular bank is twofold. The UK economy appears poised for a prolonged period of weak GDP growth due to serious structural problems such as labor shortages, weak public and private investment, low productivity and Brexit-related trade disruption.
And sadly, Lloyds has no exposure to foreign climates to offset likely weakness at home. HSBC (LSE: HSBA) and Santandercompared, it can look to fast-growing Asia and Latin America, respectively, to boost earnings. barclays Investors can expect the company’s US operations to drive results.
I am also aware that unfavorable interest rate moves can disappoint Lloyds’ earnings.
The Bank of England (BoE) may continue to tighten policy to combat persistent inflation. This would further increase the spread between the interest they charge borrowers and the interest they offer savers, increasing profits in the process.
But comments from top policymakers in recent weeks cast doubt on any further monetary tightening. Just today, BoE rate setter Swati Dhingra called for interest rates to be frozen at current levels of 4%.
These long-term threats mean that I am willing to avoid Lloyds actions. Even a minimum price-earnings (P/E) ratio of 7.5 times is not enough to tempt me to invest.
HSBC holdings
I think the aforementioned HSBC would be a better way to invest in the London banking sector. This deal certainly offers better value for money compared to the Lloyds share price, at least on paper.
The Asian banking giant is trading with a P/E ratio of 6 times. and has a dividend yield of 8.1% by 2022. But better value isn’t the only reason.
It is true that HSBC also faces significant risks of its own. Lower-than-expected interest rates would also hurt the earnings you make on your lending activities. On top of this, uncertainty surrounds its key Chinese market and neighboring territories as the Covid-19 crisis rages on.
But as a long-term investor, you would be happy to absorb these risks. This is because I think the ultimate returns from this stock could be spectacular as demand for financial services skyrockets in emerging markets. Penetration of banking products remains extremely low, while levels of personal wealth are rising sharply.
HSBC served a whopping 39 million customers in 2022. I expect the number to continue to rise as the banking market soars and the company invests billions of dollars to expand.
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