Tracing its roots back to 1765, Lloyds (LSE: LLOY) is one of the oldest banks in the UK. As such, the shares basically exist to pay dividends.
How have they done in this regard since 2019? And why have I bought them for my income portfolio?
Lloyds returns
At the start of 2019, Lloyds shares were going for 51.2p each. That’s 17% more than the 42.5p those same shares are trading for now.
The FTSE 100 bank stock paid two dividends in 2019, for a total of 3.26p per share. In 2020, however, it announced that it wouldn’t pay any dividends as it sought to preserve capital during the pandemic.
To be fair, that decision was taken along with other UK lenders following a request from the Bank of England. This was totally understandable given the UK economy faced the prospect of a deep recession.
Then, in 2021, the dividend returned at a lower 2.0p per share, before returning 2.4p per share in 2022. In the 2023 calendar year, dividend payments totalled 2.52p, which was still less than before the pandemic.
What does this mean?
Let’s assume that somebody invested £10,000 in Lloyds shares at the beginning of 2019. This would have resulted in the acquisition of about 19,531 shares.
Over 2019, this investor would have received a total of £636, or a 6.3% yield. That’s a great starting return.
As we’ve seen, however, the next calendar year would have brought nothing. But over 2021, that same investor would have bagged £390 in dividends.
By 2022, that figure would have crept up to £468, with last year (calendar 2023) yielding £492.
So, this is just under £2,000 in total dividends across this period. Or a compound annual growth rate of 3.7%, give or take. Actually, 4.6% per year if we strip out the Covid-related absence.
Does this count as rivers of cash over five years? Probably not, I think it’s fair to say, especially as rampant inflation would have eroded our investor’s spending power in real terms.
But it does mean the dividends would have made up for the share price decline. All in all, though, not a great investment so far.
So why have I invested?
Since 1694, the Bank of England’s average base rate is 5.9%. Over the last 50 years, it has averaged an even rate.
Therefore, we can see how the near-zero-rate years of 2009–2021 were a complete aberration, historically speaking. Once the economy settles, higher interest rates (2.5%-3%, say) should be a net positive for all UK banks.
Plus, I like Lloyds’ robust balance sheet as well as the dividend forecast. For 2024 and 2025, the stock has forward dividend yields of 7.5% and 8.3%, respectively.
Both prospective dividends are covered 2.2 times by anticipated earnings per share. While that guarantees nothing, this dividend coverage is reassuring and should offer a decent margin of safety.
Returning to our hypothetical investor, these yields would mean £617 this year and £693 next year. If the previous dividends had been reinvested, it would obviously be more than this.
So we can see the investment case really starts to make sense the longer the shares are held. With that well-covered 8.3% yield for 2025, Lloyds stock at 42p currently looks like a top income buy to me.
