Since the start of the year, Lloyds Banking Group’s (LSE:LLOY) share price has dropped 8% in value. It’s a descent that gives it one of the highest yields on the FTSE 100.
At 42.2p per share, the blue-chip bank’s forward dividend yield sits at 6.6%. This is far ahead of the 3.8% average for FTSE index shares.
Having said that, Lloyds shares don’t offer the biggest yield among London’s major listed banks. It beats both Barclays and Standard Chartered on this front, as the table below shows. But the Black Horse Bank doesn’t beat the yields of NatWest Group or Asia-focused HSBC.
|FTSE 100 stock||Forward dividend yield|
So should I buy Lloyds for passive income today?
In good shape
On the one hand, it’s easy to see why Lloyds remains highly popular with dividend investors today.
Okay, the British economy could be in for a period of prolonged weakness. But a robust balance sheet means the bank might be best placed to weather any storm and pay more gigantic dividends to its shareholders.
The company’s CET1 capital ratio (a measure of solvency) stood at an industry-leading 14.2% as of June. This was also way ahead of the firm’s targeted 12.5%. Lloyds decided to raise the interim dividend by 15% to 0.92p per share as a result.
Solid forecasts… for now
I think there’s a great chance Lloyds will pay the 2.79p full-year dividend that City analysts are expecting in 2023. That’s even though its recent half-year report flagged up some reasons for concern.
Not only does the company have that strong balance sheet to help it pay that projected dividend. This year’s predicted payout is also covered 2.7 times over by anticipated earnings. A reminder that any reading above two times provides a wide margin of safety.
However, I’m not convinced that the bank will be able to pay the large dividends that City analysts are expecting beyond this year. As trading conditions become tougher, Lloyds’ share price is also in danger of extending its heavy fall.
Why I’m avoiding Lloyds shares
Banks are among the most economically sensitive companies out there. During downturns, demand for their financial products can slump and loan impairments can soar.
These were both evident in Lloyds’ latest financials, which showed the company endured a larger-than-forecast £662m worth of credit impairments between January and June.
The problem is that Britain’s economy is in danger of a prolonged downturn. New Bank of England deputy governor Sarah Breeden has predicted “relatively flat GDP in the UK over the next couple of years”. Major structural problems could sap economic growth beyond the middle of the decade, too.
Lloyds is also in danger because of its reliance on a strong housing market.
Demand for home loans is flagging as interest rates curb buyer activity. Mortgage arrears are also soaring — the value of residential mortgages in arrears leapt to their highest since 2016 last month, Bank of England data shows.
Finally, established banks are also battling to stop digital and challenger banks from attracting their customers. This poses a severe long-term problem that Lloyds and its peers have yet to mount a convincing defence against.
For these reasons, I’m happy to avoid the FTSE bank and buy other high-yield shares for my portfolio.