The Lloyds Banking Group (LSE:LLOY) share price has slumped at the start of 2024. At 44.2p per share the FTSE 100 bank is down 8% since January 1.
Does this represent a tasty dip-buying opportunity? Well, investors hunting for lucrative dividend shares to buy may be tempted to open a position today.
As the table below shows, dividend yields for the next two years comfortably beat the 3.8% forward average for FTSE shares.
| YEAR | DIVIDEND PER SHARE (F) | DIVIDEND YIELD | ANNUAL GROWTH |
|---|---|---|---|
| 2024 | 3.17p | 7.2% | 14% |
| 2025 | 3.54p | 8% | 12% |
The dividends on Lloyds shares have grown sharply since the end of the pandemic. And if City forecasts prove correct, if I invested £10,000 in the Black Horse Bank today, I’d make passive income of £720 this year and an even better £800 in 2025.
But dividends are never guaranteed. So I need to consider how realistic current dividend forecasts are. I also need to consider the outlook for the Lloyds share price. After all, a further erosion in the value of the bank could outweigh the boost of big dividends.
Here’s my conclusion.
Strong forecasts
On the plus side, barring some catastrophic event, Lloyds looks in good shape to meet current forecasts for the next two years.
Predicted dividends are covered 2.3 times by anticipated earnings through to 2025. Both readings sail past the widely regarded safety benchmark of 2 times, providing a wide margin of error even if earnings do disappoint.
The bank also has a strong balance sheet it can use to fund more large dividends if required. Its CET1 ratio stood at 14.6% as of September, well above its target of 12.5% plus 1% management buffer.
Big risks!
So, in my opinion Lloyds shares look in good shape to pay an £800 passive income in 2025. However, this doesn’t mean I’m necessarily looking to buy the FTSE 100 bank for my portfolio.
This is because I buy shares with a long-term view in mind. I’m seeking ones that can deliver solid capital gains and/or a healthy, growing dividend over time. I’m not sure that Lloyds will be able to do either of these things.
One reason is the worsening outlook for the UK economy. In a sign of the gloom, the Office for Budget Responsibility (OBR) recently cut its growth forecasts for each of the next two years by around a percentage point each. GDP expansion of just 0.7% and 1.4% is tipped for 2024 and 2025, respectively.
Britain faces significant structural problems that threaten growth beyond the short term too.
Should I buy Lloyds shares?
I’m also concerned about Lloyds given the condition of the domestic banking market. Not only is it much more mature than those of emerging markets. Competition is also rising as challenger and digital banks expand their profit ranges.
On the plus side, the bank has exceptional brand recognition that it can use to win business. Having a 258-year-old brand is worth its weight in gold when youre looking after people’s money.
But on balance I think the risks of owning Lloyds outweigh the potential benefits. I believe there’s a good chance its share price will continue sliding. And the dividend outlook beyond 2025 is also pretty uncertain.
This is why I’m looking for other FTSE 100 dividend stocks to buy right now.
