Shares in Lloyds Banking Group (LSE:LLOY) are still trading below 50p. I think there are a number of reasons to think they’re a bargain at today’s prices.
The stock comes with a dividend yield above 5% and there’s reason to be optimistic about the business going forward. But should an investor with £10,000 in excess savings use the cash to buy Lloyds shares?
Is it a good stock to buy?
The first question is whether or not Lloyds is a good stock to consider buying. I think it is. The firm has a strong competitive position and at a price-to-book (P/B) ratio of 0.7, it looks reasonably priced.
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There’s also scope for growth. The company is attempting to acquire the banking operations from Tesco as well as executing a turnaround in its corporate banking business.
I think the biggest risk with Lloyds is there’s a lot that’s beyond its control. For example, investors ought to be mindful of a possible windfall tax as higher interest rates have let to increased profitability.
The company’s CEO has spoken out against this, but it ultimately isn’t up to the bank. For that reason, while I’d be happy to buy the stock, I’d hesitate before putting all my spare cash into Lloyds shares.
Diversification
One way I could try to limit the risk of investing in the shares is by attempting to divide a £10,000 limp sum between a number of stocks. Ideally, those in separate industries and/or geographies.
For example, I could invest £2,500 in each of Lloyds, Rolls-Royce, Primary Health Properties, and Apple. That way, 75% of my portfolio would be protected from the risks that come with banks.
Of course, that would leave me more exposed to the risks of those specific companies, as well as a general downturn in share prices. But the point isn’t to eliminate the risk entirely – it’s to reduce it.
Even with just a few stocks, it’s possible to build a reasonably diversified portfolio. Those I’ve listed here are an example, but I think it might be a good thing for an investor with £10,000 to think about.
Regular investing
Even if I really think Lloyds is the best stock to buy at the moment, there are still things I can do to limit my risk. One is by investing gradually over time.
Instead of buying 21,070 shares straight away, I could look to invest £2,500 every three months for a year. This could have some real advantages.
First, if the share price drops, I might be able to buy more shares at a better price. If the stock is lower after three months, I could add to my investment with more shares.
Second, I might be able to diversify my investments by taking advantage of declines in other shares. Even if I decide that Lloyds is the stock I’m most confident in right now, this won’t always be the case.
I like Lloyds Banking Group as a stock to buy. But with £10,000 to invest I’d be tempted to use at least part of that cash to look for other opportunities, either immediately or over time.
