Is Lloyds Banking Group PLC A Super Income Stock?

Does Lloyds Banking Group PLC (LON: LLOY) have the right credentials to be classed as a very attractive income play?

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LLOY

Shares in Lloyds (LSE: LLOY) (NYSE: LYG.US) have enjoyed a scintillating year. They have delivered capital gains of 64% and have easily outpaced the FTSE 100, which has posted gains of just 5%.

Despite this, Lloyds has been unable to deliver profit (on a per share basis) since 2009 and, subsequently, has not paid a dividend over the last five years. However, that’s about to change, with the bank set to return to profitability in 2014 and to begin making dividend payments in the same year. Therefore, is Lloyds all-set to become a super income stock?

Although Lloyds is set to start dividend payments later this year, the amounts involved are not particularly exciting. Indeed, Lloyds is forecast to pay just 1.5p in dividends per share during 2014, which equates to a yield of just 1.8%. This is roughly in-line with rates from a typical high-street savings account and slightly below inflation. It is, however, some way behind the FTSE 100’s yield of 3.5%.

However, a payment of 1.5p per share represents just 20% of the profit Lloyds is forecast to deliver in 2014. The bank has stated previously that it is targeting a dividend payout ratio of around 65% by 2016, so expect to see dividends per share increase at a brisk rate between now and then. If, for example, Lloyds were to pay out 65% of 2016’s forecast profits, it would equate to a dividend of around 5p per share. This, in turn, would mean share in Lloyds yield over 6% (assuming the share price does not change) in 2016.

Evidence of the speed at which Lloyds looks set to increase dividend per share payments can be seen in the forecast for 2015. Dividends per share are expected to increase from 1.5p in 2014 to over 3p in 2015, which shows the potential for significant growth in income for investors in Lloyds.

So, while Lloyds may not yet be a super income stock, it looks set to rapidly move towards that status over the next few years. For investors who have the time to wait for a higher yield, Lloyds could prove to be a great income play over the long run.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter owns shares in Lloyds.

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