Lloyds Banking Group (LSE: LLOY) shares have fallen 11% in value over the past year. This reflects growing investor fears over the UK economy. But its also pushed the bank’s dividend yield through the roof.
Based on Lloyds’ dividend forecast for 2022 its shares carry a yield of 5.6%. The dial moves to an even-more impressive 6.2% for 2023 too. These yields look pretty impressive, then. And certainly compared to the FTSE 100 forward average of 4%.
So is now the time to add Lloyds shares to my dividend portfolio? Here I’ll examine Lloyds’ dividend forecasts for the next couple of years and explain whether I’d buy the bank for my own portfolio.
Lloyds’ dividend history
Banking shares across the London Stock Exchange slashed their dividends in 2020. This followed advice from the Prudential Regulatory Authority as panic over the coronavirus spread. Lloyds cut its own payout to 0.57p per share from 3.37p previously.
Dividends bounced back last year though, when the payout was raised to 1.12p per share. City analysts think investors will keep enjoying dividend increases too. Total dividends of 2.35p and 2.58p are expected in 2022 and 2023 respectively.
The good thing for investors is that Lloyds’ dividend forecasts don’t just boast big yields. Projected payouts are also covered by expected earnings between 2.5 times and 2.7 times over the next two years. A reading over 2 times provides a good margin of safety for investors.
What’s more, the bank also has a rock-solid balance sheet to help it pay meaty dividends if earnings disappoint. Its CET1 capital ratio was 14.2% as of March, more than three percentage points above target.
Recession risks
On the face of it then, Lloyds could look like a slam-dunk income stock to buy. However it’s important to remember that yields are based on the dividends City analysts are expecting. And there’s a chance they could miss the mark as the UK veers towards recession.
Even if Lloyds has the means to pay big dividends it might be reluctant to do so in an increasingly-uncertain environment.
A worsening cost-of-living crisis means economists continue to downgrade their GDP estimates for Britain (the OECD for example now expects no growth at all in 2023). Banks here could witness a tidal wave of bad loans and a slump in revenues that could cause dividends to disappoint.
So should I buy Lloyds shares?
It’s not all bad over at Lloyds however. The profits it receives on its lending activities could continue to rise as interest rates likely increase. The Bank of England says inflation is set to hit 11%, up further from June’s 40-year highs of 9.1%.
But, all things considered, the risks of high inflation to cyclical shares like Lloyds considerably outweigh this benefit. Indeed, the bank’s ultra-low P/E ratio of 6.5 times underlines the massive risks to its profits right now. I’d much rather invest in other dividend stocks today.
