Could Lloyds shares be a top FTSE 100 dividend pick?

Jonathan Smith explains how the 2.65% dividend yield currently offered by Lloyds shares is just a start for what could become an income investor favourite.

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Over the past year-and-a-half, income investors like myself have seen dividends cut by various firms. Lloyds Banking Group (LSE:LLOY) is one such example. Following a request by the regulator (the PRA), UK banks halted dividend payments. This was in order to bolster cash flow and aid the balance sheet. Lloyds shares fell for much of last year, but following the recent resumption of dividends, could this be a great buy for the future?

Resuming dividends

Unlike companies in other sectors, it’s important to note that the dividend on Lloyds shares was cut last year due to the recommendation by the PRA. I don’t know whether the bank would have kept on paying income if this request wasn’t made, but it wasn’t a decision the bank took the direct initiative on. 

Add into the mix the fact that Lloyds is straight away coming back and offering income payments following the lifting of such guidance. This shows to me that the bank is keen to attract and reward shareholders via dividends. For years before the pandemic, Lloyds shares offered investors a healthy dividend yield between 3%-6%. Given the fact that the bank is mature and unlikely to have rapid future growth, getting income investors on board is a key way to support the share price.

This was shown in part by the latest half-year results. Aside from the increase of 8% in net income from the second half of last year, other good news came from the dividend announcement. A further 0.67p per share is going to be paid, taking the total dividend over the past year to 1.24p. With Lloyds shares trading around 46.8p, it offers a dividend yield of 2.65%.

Pros and cons of Lloyds shares

A dividend yield of 2.65% doesn’t make Lloyds shares a current FTSE 100 dividend star. The average dividend yield within the index actually sits just above 3%. Yet it’s the outlook that makes the shares appealing to me. The report spoke of the fact that “this dividend reintroduces a progressive and sustainable ordinary dividend policy”. It’s a step in the right direction and one that I think could continue, with the dividend per share rising.

Lloyds is performing well. The mortgage book saw growth of £11.4bn in H1, with an average loan-to-value (LTV) of 63%. This LTV means a high level of customer deposits which means the risk on mortgages is low. The corporate bank also continues to highlight a lack of exposure to negatively impacted industries. Even the net interest margin (the difference between what the bank lends at and what it can borrow at) is expected to hold around 250bps for the rest of 2021. If this is the case, I’d be impressed.

There are some negative points to consider before I would buy Lloyds shares. The mortgage growth is great, but what if we see a house prices crash? And what if the corporate bank sees larger than expected loan defaults later this year due to the Delta variant? 

On balance, Lloyds isn’t the best FTSE 100 dividend stock for me to buy for short-term rewards. However, I would still buy it now as it’s a sustainable dividend payer with a positive outlook.

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 share 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.

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