Should I disregard the Lloyds share price and focus on the 7% dividend yield? 

City analysts predict chunky increases ahead for the Lloyds dividend, so does it even matter what happens to the share price?

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The Lloyds Banking (LSE: LLOY) share price has been all over the place. But with the stock near 43p, the forward-looking dividend is yielding more than 7% for 2024.

That big potential payment arises because City analysts have forecast some hefty uplifts for the dividend ahead – almost 17% this year and around 11% for 2024.

So should I just focus on the company’s dividends and forget all about the wiggly share price? After all, isn’t that what dividend-led investing strategies are all about?

Some particular risks to consider

To answer my own question, I’d say that caution is needed when investing in Lloyds for its dividends. And the main reason for that is the banking sector is horrendously cyclical. 

But what does that even mean?

Well, one risk is the share price can take the capital value of an investment in Lloyds way down. So far down that years’ worth of dividend income might not be able to plug the whole and help an investment show a profit in a portfolio.

It also means dividends might disappear altogether for long periods. And if that happens, the share price will probably fall too. And that would be a double hit to a portfolio.

However, cyclicality can also work in an investor’s favour if the timing of an investment in the shares proves to be favourable. Catch a cyclical business like Lloyds on the uptick of its trading and share-price cycle, and the position could prove to be rewarding in a portfolio. 

Perhaps an investor might see capital gains and rising dividend payments from an investment in Lloyds shares. But as with all cyclical companies, the music will likely stop at some point and gains could reverse.

We only need look at Lloyds’ long-term share price chart to see how volatile the stock has been.

And the financial and trading record points to other red flags – particularly when considering Lloyds for its dividends.

Year to 31 December2017201820192020202120222023E2024E
Normalised earnings per share (p)4.946.423.91.218.61.87.497.64
Dividend per share (p)3.053.213.260.572.02.42.83.11

It’s clear from the table that dividends were trimmed in the pandemic year of 2020 under pressure from the regulators at the time.

A round trip with dividends

But Lloyds appears to have used the situation to rebase dividends lower. And even if those predicted increases mentioned earlier occur, the dividend will be essentially flat compared to 2017.

We could argue the past three or four years have been extraordinary in terms of macroeconomic and geopolitical events. But I’d say that Lloyds has just been doing its cyclical thing.

The banks are perhaps the most sensitive of all listed businesses to cyclical events and economic shocks.

However, despite my caution regarding taking a long-term position in Lloyds shares, earnings look set to explode higher this year. And the share price seems to have already cycled down. 

Perhaps now is a good time to catch the stock for one of those shorter-term cyclical upticks. Although positive outcomes aren’t guaranteed.

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.

Kevin Godbold 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.

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