Should I buy Lloyds shares now as a future potential dividend star?

After the recent resumption of the dividend, Jonathan Smith looks at the historic yield and thinks Lloyds shares could be a buy now for future income.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

New British One Pound Sterling Coin Chart Rate.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Lloyds Banking Group (LSE:LLOY) shares are frequently among the most traded stocks within the FTSE 100 index. Over the past couple of years, the focus has been on potential share price growth instead of dividend potential. The last dividend was paid out back in September 2019. Since then, the impact of the pandemic has meant that the bank has cut the dividend. Times are changing, so could now be the right time for me to buy Lloyds shares for future dividend income?

The 2020 dividend cut

The decision to cut dividends last year wasn’t solely down to Lloyds. As the pandemic started to grow, the PRA regulator contacted all major banks. It advised them to cut dividends in order to maintain a strong cash position. Given the relationship between the regulators and banks these days, any ‘advised’ action is taken as an instruction by a bank.

Even without the PRA call, I think Lloyds would have decided to cut the dividend anyway. Last summer, the bank was reporting the need to set aside £4.5bn-£5.5bn for bad loan provisions. Although the year-end figure was reduced to £4.2bn, during 2020 that end figure was still unknown. So the safe thing to do was to cut the dividend in case the provisions figure was at the top end of the estimate. 

Even if the bank had kept the dividend, I still don’t think it would have stopped the slide in Lloyds shares. Technically, the share price is up 39% over the past year. However, this doesn’t include the market crash from March. Over two years the share price is down almost 37%, which I feel is a more accurate representation of its performance during this period.

My outlook for Lloyds shares

Looking forward, things do look brighter for income investors buying Lloyds shares. In February, the bank announced a resumption of dividend payments, due to be paid at the end of May. The amount was 0.57p per share. 

Using a current share price around 42p, this provides a dividend yield of 1.35%. The FTSE 100 average yield is 3.06%, so it currently isn’t a dividend star by any means. But this is just the start, a tentative toe in the water from the management team. 

Back in 2019, buying Lloyds shares would have given me a dividend yield above 5% for most of the year. So it’s clear that although past performance is no guarantee of future returns, the dividend yield for Lloyds should return over time to a higher level.

One risk to buying Lloyds shares is the continued low-interest-rate environment we find ourselves in. This ultimately will make it hard for a retail-focused bank to make money in the traditional way, given the fact that the rate is so low. 

Yet overall, I do think Lloyds shares are a good buy for myself for future dividend income. With the share price low based on historic levels, buying now could help me to increase my yield down the line. For example, if I buy at 42p and next year the dividend gets raised to 1.14p, my yield has doubled to 2.7%.

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.

jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may 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.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »