Here’s how much I’d need to invest in Lloyds shares for £1,000 a year in passive income

Lloyds shares remain popular with UK dividend investors. Here I explore how much it would cost to generate £1,000 a year in passive income from them.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young Black woman using a debit card at an ATM to withdraw money

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

After a gentle climb to start 2023, Lloyds (LSE: LLOY) shares soon headed lower once the recent banking crisis started to unfold. They’re now 9% cheaper than they were a month ago.

So is this an attractive entry point for dividend investors searching for passive income? Here’s my take.

Going back in time

We haven’t seen the phrase “systemic risk” used this much since the 2007/08 financial crisis. So it does feel like revisiting the past somewhat.

Yet that’s where the similarities end, according to Andrew Bailey, the Bank of England Governor. He told MPs this week that “We’re in a very different place to then“.

And he thinks the woes that afflicted Silicon Valley Bank (SVB) and Credit Suisse shouldn’t affect the UK banking system. He said it’s “not showing any signs of problems“.

Meanwhile, Lloyds stock now has a price-to-earnings (P/E) ratio of just six. That’s much lower than the FTSE 100 average, though banks’ earnings multiples have persistently been below the index average.

By most metrics, Lloyds stock always seems to look cheap.

Indeed, some investors see it as the quintessential value trap, given its two-decade history of shedding incredible amounts of value.


However, I’m quite bullish on the business moving forward. Mainly because I think the decade-long era of abundant and cheap capital should now be over for good.

This strange period of near-zero interest rates sits in complete contrast to the 400-year average of over 4%. It was an aberration.

But today, the base rate in the UK is back to 4.25%. And higher rates allow banks to widen their net interest margins (the difference between interest received and interest paid). So I’d expect earnings and dividends to rise in the years ahead.

Plus, CEO Charlie Nunn is planning to diversify Lloyds’ income away from mortgages towards areas like insurance and wealth management.

While this comes with its own risks, I like this move for a couple of reasons.

Firstly, it’ll make the business less reliant on interest rates. But more importantly, I think that these potential growth drivers could make the shares look more attractive to investors in general.

A grand a year in passive income

So how much would I need to invest in the shares to aim for £1,000 a year in passive income?

Well, the stock currently yields a market-beating 5.2%, nicely covered three times by trailing earnings. That means I’d need to invest £19,400 to generate a grand a year, as things stand.

Of course, that’s not guaranteed (no dividend is). And while Lloyds appears to be insulated from the problems engulfing some other financial institutions, no lender is ever truly immune from a sudden bank run.

As Warren Buffett once observed: “If the CEO of the bank came out and said, ‘Our Basel II ratio is 11.4 percent,’ the line would just lengthen.

These events are driven by emotion rather than solvency.

Overall though, I don’t see any major red flags here. The UK’s largest retail bank has a diversified deposit base and is strongly capitalised. And the dividend appears solid to me.

So, if I had spare cash today, I’d certainly consider Lloyds shares for passive income.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc. 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.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

3 UK stocks I reckon could benefit from the upcoming general election

As the general election hurtles towards us, this Fool wonders which UK stocks could benefit, and focuses on three picks…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

At 11%, this dividend share pays the biggest yield in the FTSE 100

When a dividend share offers a big yield, we need to be cautious of the risks. But I reckon this…

Read more »

British Isles on nautical map
Investing Articles

I reckon Hiscox shares could be one of the best bargains on the FTSE

I've been investing in FTSE companies for years, but after a major decline I've not seen a company with as…

Read more »

Grey Number 4 Stencil on Yellow Concrete Wall
Investing Articles

4 reasons I’d still buy National Grid shares in a heartbeat despite the recent wobble!

As National Grid shares plunged on the news of a right issue, I’m not flinching, and reckon it's a top…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

After gaining 45% in 12 months, is the Amazon share price now overvalued?

Our author thinks the Amazon share price might be too high. While the long-term future of the business looks bright,…

Read more »

Investing Articles

2 hot dividend stocks I’d buy and hold for 10 years

Our writer reckons these two dividend stocks could help her bag juicy dividends for years to come and explains why.

Read more »

British Pennies on a Pound Note
Investing Articles

2 dividend-paying penny shares I’d happily own

These two penny shares have caught our writer's eye for a combination of income prospects now and business growth potential…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

This FTSE 250 share looks like a bargain to me!

This FTSE 250 share has seen its price tumble due to chaotic local economic conditions in a key market. But…

Read more »