Lloyds Bank shares have long been a favourite of UK retail investors. Rarely does FTSE 100 stock not feature in the list of most popular buys. One reason for its enduring popularity has been the passive income stream. Should it therefore be my first point of call if I were looking to build a dividend-focused portfolio?
Passive income perfection?
The consensus among analysts is that Lloyds shares will return 2.34p per share in cash to holders for FY22. Using last Friday’s closing price, this equates to a 5.2% dividend yield, placing the bank towards the top end of income stocks in the FTSE 100. It’s also better than the 3.5% yield generated by the index as a whole.
Without wishing to state the obvious, the payout from Lloyds is also far more than I’d get from any savings account in the form of interest. True, the value of the money in my bank account won’t jump around like the value of Lloyds shares, but it’s still being eroded due to inflation. So keeping this cash ‘under the mattress’ rather than buying stock is potentially an awful lot worse for my long-term wealth.
Risks to consider
One of the great things about investing for passive income is that I don’t need to stay glued to my screen, watching share prices rise and fall. So long as Lloyds is able to pay this dividend, I can pretty much switch off from the daily news. But can it?
Well, a lot depends on whether Lloyds can meet expectations on earnings. Right now, analysts believe it will be able to cover dividends over twice by profits. This makes an imminent cut very unlikely.
However, this is not to say that Lloyds’ passive income credentials are beyond threat. For evidence of this, the company was forced to curb dividends significantly in 2020 due to Covid-19-related uncertainty.
The current outlook isn’t crystal clear either. While rising interest rates are good news for lending profit margins, rising inflation could lead to lower spending by consumers. This may disrupt the growth plans and, subsequently, the borrowing needs of businesses. Even if it doesn’t instigate a cut, a recession could force Lloyds to maintain rather than increase dividends for a while.
Cheap FTSE 100 stock
In fairness, the income stream from any stock is never guaranteed. No one knows for sure what will happen next with regard to the global economy.
One might also say that these concerns are already reflected in the Lloyds Bank share price. A fall of 10% year-to-date leaves the stock trading on just seven times forecast earnings. By compaison, peer HSBC trades at nearly 11 times earnings and yields ‘just’ 3.9%. Barclays has a valuation similar to Lloyds but doesn’t possess as significant a grip on the UK mortgage market (although this can be viewed both positively and negatively).
My verdict
All things considered, Lloyds looks to me to be a pretty solid (but not perfect) option if I were looking for dividends. It’s a buy for me.
Even so, I’d be sure to spread my money around the UK market. A degree of diversification may reduce how much cash I receive but it will also ensure that any potential issues with Lloyds’ payout can be mitigated by the passive income garnered from elsewhere.
