Can Lloyds dividends come back strongly in 2022?

The Lloyds (LON: LLOY) dividend has crept back to positive territory, as we await 2021 news. Will 2022 get it back to long-term growth?

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Close-up of British bank notes

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Dividends have saved my long-term investment in Lloyds Banking Group (LSE: LLOY) from being a total disaster. I’m down about 40% on the share price since I invested. But the 4%-5% or so in income that I’ve been getting each year has helped offset that pain. Well, my Lloyds dividends had been rolling in until Covid-19 arrived, at least.

After a pause, the bank came back with a modest 0.57p per share in 2020. That was really not too exciting. I’m not expecting the 3p levels we saw prior to the crash. But I do want to share my thoughts on what might affect the Lloyds dividend in 2022 and beyond.

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Firstly, what does Lloyds itself say? With 2021 interim results released in July, the bank said it had “reintroduced a progressive and sustainable ordinary dividend policy, with an interim ordinary dividend of 0.67 pence per share“. That’s not a lot, but it does exceed the total paid for 2020. And the statement went on to speak of “the Board’s commitment to future capital returns“.

It was probably wise for Lloyds to remain reasonably tight-lipped about full-year dividend prospects at the time. Our Covid-19 outlook was, after all, very uncertain. And the economy didn’t look too bright either. But six months on, what are the Lloyds dividend prospects looking like?

Lloyds dividend cover

At that halfway stage, the bank had posted pre-tax profit of £3.9bn. And by Q3, the nine-month figure was up to £5.1bn. I remain cautious, though, as there’s a net impairment credit in there. It wasn’t purely through improved trading.

A first-half EPS figure of 5.1p implied dividend cover of 7.6 times. By comparison, the 2018 dividend was covered 1.7 times by earnings. If Lloyds had paid out at that old ratio, it could have afforded 3p per share. And that alone would represent an annual yield of 5.9% on today’s price.

Saying that, I’m really not expecting the Lloyds dividend to get close to 2018 levels of cover any time soon. Progress in that direction will surely depend on a number of things.

One, yes, is that virus. But sooner or later, we’ll surely move from pandemic to endemic status. It will become something we have to live with and deal with, just like influenza.

Post-Brexit banking

I think the big test is going to be the success (or otherwise) of Lloyds’ post-Brexit business model, focused on the UK economy. And we’ve really not seen how it might go yet. As the UK’s largest mortgage lender, the housing market over the next few years should prove crucial too. A then there are interest rates. While those remain super low, I think investor confidence in the banks will remain weak.

Full-year results are due on 24 February. I suspect we’ll see Lloyds continuing with a conservative approach, with no rapid dividend escalation. And I reckon it might easily take another year to get a feel for the long-term Lloyds dividend outlook.

But I do think 2022 could provide the platform for a strong dividend future, even if we don’t see big payments this year. I’m likely to buy more.

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Alan Oscroft owns Lloyds Banking Group. 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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