Until recently, I’d never owned Lloyds (LSE: LLOY) shares for passive income. I’ve previously been put off by the disappointing share price performance, near-zero interest rates, and the threat of disruption from digital banks.
However, I’m now a shareholder, and there are a few simple reasons why.
A normalisation of interest rates
Historically speaking, the near-zero interest rates we experienced following the 2007/08 financial crisis were an aberration. But now the base rate is at 5.25% as the Bank of England attempts to drive high inflation out of the economy.
Never say never, but I can’t see it going back to near 0% any time soon, especially as two of the biggest economic themes in the coming years are likely to be deglobalisation (specifically supply chain onshoring from East to West) and the green-energy transition.
These trends are tipped to have repercussions. For example, Wall Street hedge fund manager Bill Ackman thinks such structural changes to the global economy will lead to persistently higher inflation. As a result, he’s only backing companies that he thinks are sure to preserve their pricing power.
Meanwhile, reinsurance company Swiss Re expects so-called greenflation to add around 1% to Consumer Price Index (CPI) inflation between 2022 and 2031 in both the US and Europe.
When interest rates are higher (but not too high), banks make more money by taking advantage of the greater spread between what they charge borrowers and what they pay savers.
Enticing passive income potential
My second reason for investing is the very attractive and well-covered forward dividend yield.
According to forecasts, Lloyds shares are going to yield 6.6% this year. For 2024, the forecast dividend yield is 7.6%. These respective payouts are covered 2.7 and 2.3 times by expected earnings.
While no dividend is truly guaranteed, this healthy coverage suggests to me that the passive income prospects are solid.
Fleshing this out, it means I could expect to receive £1,000 in annual passive income next year from 31,300 shares. At today’s share price of 42p, they would cost me around £13,265.
Now, that’s not loose change, and it’s a lot more than I’ve just invested. But I’ve now committed to building up my holding and reinvesting any dividends I receive to buy more Lloyds shares.
FinTech threat?
Finally, I’ll mention competition from new digital banks and FinTech companies. These include Atom, Tandem, Revolut, Monzo, Starling Bank, Chase, and Wise.
For sure, these have the potential to chip away at Lloyds’ market share over time. But the banking giant already partners with and funds many FinTechs via a specialist investment team.
Some of its investments can be seen below.
Undoubtedly, UK savers today are on the hunt for higher savings rates and many of these smaller rivals pay better rates. This means Lloyds will have to pay up or face losing customers, and that might squeeze profits to a degree.
However, FinTech competition in general isn’t exactly a new threat. Starling Bank, for example, is nearly 10 years old, while Wise was founded in 2011. Yet Lloyds is still expected to post a net profit of about £5.2bn this year.
If the centuries-old banking group is being disrupted, it’s happening slowly. I don’t reckon the passive income is in danger. I’m buying.
