On paper, the dividend yield at high street bank Lloyds (LSE: LLOY) quite appeals to me. At the moment, the Lloyds dividend yield is 4.8%. Not only that, but the bank has indicated that it hopes to keep raising its payout. Such a plan is never guaranteed to happen in practice. But from a shareholder perspective, it can be reassuring to know that at least it is the goal towards which management is working.
Back to the future
However, one concern I have about the bank’s current management is that it has not exactly been quick to restore the Lloyds dividend to where it stood before the pandemic.
Back in 2018, the Lloyds dividend per share came in at 3.21p. The following year, the interim dividend grew by around 4.7%. But the bank did not pay a final dividend as the pandemic set in.
Dividends came back last year, at the rate of 2p per share. This year, the interim Lloyds payout grew by 19.4%. That is a big jump. But it was not enough to take it back to where it was in 2018.
In fact, even if the bank continues with increases at that level, the dividend will not return to 2018’s level until 2024. That gap of six years makes me think the bank is not really prioritising dividends right now. After all, the business has been performing well and announced a £2bn share buyback this year. So it has sufficient funds to restore 2018’s status quo if it wants to. It has just decided not to, which I do not see as a very shareholder-friendly choice.
Financial crisis
This is not the first time that Lloyds has cut its dividend in response to a crisis.
Back in 2007 when the bank was riding high, the Lloyds dividend was a meaty 36p per share.
If it keeps increasing even at 19% per year – which is a high rate of increase to sustain – it will get back to the 2007 level only in 2038. I am a long-term investor so do not mind being patient. But over three decades simply to take it back to where it once stood requires massive patience from investors. It also requires a lot of things to keep going right for Lloyds. While business is strong at the moment, the worsening economy could push up loan defaults and hurt profits.
In fact, that was basically the story of the financial crisis – a sudden shift in the economy hurt the banking sector, leading to problems for a wide range of lenders. Lloyds has a bigger financial cushion now than back then, but an economic crisis can badly hurt even well-run banks.
My move now
Having said all that, I think the Lloyds dividend could get back to where it was before the pandemic in the next several years. In theory it might even return to where it stood before the last financial crisis. But I do not expect that to happen for many years, if at all.
I see more promising income opportunities elsewhere from firms I think face less risk from a financial downturn. So I do not plan to add Lloyds back into my portfolio right now.
