Lloyds Banking Group (LSE:LLOY) is regularly one of the most traded stocks on the FTSE 100 by total volume. Historically, this had mostly been related to the potential capital appreciation that investors believed in. However, I think more and more are now looking at Lloyds shares for dividend income. Here’s why that might not be a bad idea for me in 2023.
Starting to garner attention
During the pandemic, Lloyds was advised by the banking regulators to avoid paying out dividends in order to protect cash flow. This reduced the dividend yield to 0%, meaning that I wouldn’t have received any passive income at that time.
Pressures regarding loan defaults have now eased somewhat. In May 2021, a final dividend was resumed of 0.57p per share. This year, the dividend amount more than doubled to 1.33p. This mirrors the state of the profitability for the bank over the same period.
Currently, the dividend yield is 4.62%. This sits above the average FTSE 100 yield of 3.64%. For income investors, this yield could increase further next year if the dividend per share tracks higher.
I need to keep in mind the fluctuations in the share price. Over the past year, it’s down 3%. This doesn’t materially change the yield, but if the stock suddenly dropped by 10% or more, the overall dividend yield would reflect a large rise.
My outlook for Lloyds shares
Even though the dividend details are key for me as an income investor, it’s not the only point of note. I’m also focused on the fundamental outlook for the business. After all, if the bank suddenly falls to making a loss, the dividend will likely be cut.
At a broad level, the outlook for UK banks in positive for the next year. Lloyds and other big names are being buoyed by the high interest rates (which I think will continue to increase in 2023). This helps to increase the net interest income the bank makes. It largely comes through the spread the company makes between charging for lending out money and paying out interest on deposits.
One risk I do note is the fragile state of the UK economy. Even though I don’t think the banking sector will be the most negatively impacted here, it’s still not a positive. Lloyds has a large retail base. Tough financial times will see lower transactional activity, lower mortgage application, and other points.
The bank is also continuing to close branches, with a pivot towards digital. In the short run, this will create higher costs. Yet over time, it’ll offer much greater efficiencies and lower operating costs. Therefore, I don’t see this as a large cause for concern.
Not a rocket ship, but still flying high
Lloyds isn’t the most exciting dividend stock in the FTSE 100 right now. Yet in terms of a company that I think could be a reliable dividend payer in coming years, it ticks most boxes. On that basis, I’ll be buying some stock when I have free cash, hopefully before year-end.
