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The Lloyds (LSE: LLOY) share price has slumped 7% in 2022. This gives the FTSE 100 bank a market-beating dividend yield that makes it popular with investors seeking top income stocks.
I can see why ‘The Black Horse Bank’ is so attractive at current prices. It trades on a forward price-to-earnings (P/E) ratio of 6.5 times. And that dividend yield I mentioned currently sits at 5.4%, well ahead of the 3.8% FTSE 100 average.
Good and bad
Lloyds shares could continue soaring in value, too, if the Bank of England keeps rapidly hiking interest rates. This is good for banks as it raises the difference between what rates they offer to borrowers and to savers.
That said, the risks of buying UK-focussed retail banks remain significant as the country slumps into recession.
This week the OECD predicted that Britain will be the second-worst-performing G20 economy next year. It’s forecast domestic GDP will fall 0.4%. In this landscape an avalanche of bad loans and a period of disappointing revenues could be coming Lloyds’ way.
A better income stock
In my opinion, the risks of owning Lloyds shares far outweigh the potential benefits. And the bank’s long-term view is packed with danger, too, as competition from challenger banks intensifies.
As an investor, I like its low P/E ratios and big dividend yields. But there are plenty of top FTSE 100 stocks offering excellent all-round value today. So I don’t need to gamble with high-risk shares like this.
Compass Group (LSE: CPG) is one FTSE index dividend stock I’d much rather buy in December.
First off I’ll acknowledge that the food services business doesn’t offer the biggest dividends out there. For this year its dividend yield sits back at 2.2%, well below the equivalent for Lloyds shares.
But the prospect of rapid dividend growth still makes it an attractive income stock to me. City analysts expect the annual payout to jump 29% in fiscal 2023.
Compass is on a roll right now. Revenues are improving every quarter and on an organic basis these rose 37.5% in the 12 months to September 2022. This drove underlying operating profit almost nine-tenths higher year on year.
The business is thriving in the post-pandemic economy. It added £2.5bn worth of business from new customers last year. Meanwhile, its customer retention rate jumped to a record 96.4%.
Compass’ operating margin also continues to improve rapidly. This jumped 170 basis points to 6.2% in financial 2022.
A FTSE 100 bargain
Yet despite this impressive momentum the company’s shares remain massively undervalued. Today it trades on a forward price-to-earnings growth (PEG) ratio of just 0.5.
However, it’s the prospect of strong and sustained dividend growth that attracts me to Compass shares.
The business could endure disappointing profits if the global economy slumps next year. But a strong balance sheet should still allow it to keep hiking dividends. Indeed, robust cash flows saw it launch a fresh £250m share buyback programme this week.
Compass isn’t without risk. But I feel it’s in better shape to provide decent long-term dividend income than Lloyds shares. With cash to spare, I’d much rather buy the fabulous food producer.