Last year saw high street bank Lloyds (LSE: LLOY) raise its annual shareholder payout by a fifth. That 20% increase in the Lloyds dividend means that, at the current share price, the shares yield 6%.
If we see more big increases in the dividend, the prospective dividend yield could be even higher than that.
Where might things go from here – and could now be the right moment for me to invest in the bank?
Lower but still big rise
The interim dividend this year rose at a lower rate than in the previous 12 months. Still, the increase was 15%. That is sizeable.
We do not know what will happen at the full-year level. But if the interim payout is anything to go by, I would not be surprised to see a 15% increase.
That would mean a final dividend of around 1.84p per share. That would be a prospective yield of around 6.6% at the current share price.
Potential for more
But the bank could decide to keep growing the full-year dividend at 20% annually if it wanted to. I do not expect that to happen. If it was on the cards, I think it would have been more clearly signalled in the interim results.
But it is a possibility. Last year, the Black Horse bank made a £6.9bn pre-tax profit. Its dividend cost £1.5bn. In other words, if profits continue at the same level, the cost of the Lloyds dividend could grow by 20% annually for the next eight years and still be covered by pre-tax profits.
On top of that, a large share buyback programme means there are now fewer shares in circulation. So growing the annual dividend per share this year by 20% would not actually necessitate 20% more expenditure than last year.
Looking ahead
Even now, the Lloyds dividend is lower than it was before the pandemic. So not only could the company afford a higher payout, doing so would simply bring it back to what it used to be.
But while I expect the dividend will reach its 2018 level again, I do not expect 20% or even 15% annual dividend increases in coming years. This is for a number of reasons.
As the share buyback shows, the company is generating plenty of spare cash right now – but only wants to use some of it to increase the dividend.
Lloyds has advantages including a proven business model, strong brands and large customer base. With a weak economy though, I see a risk that mortgage defaults could increase. With is large book of home loans, that could eat into profits at Lloyds. That could mean dividend coverage falls from its current very high levels.
Lloyds has cut its dividend in the past, most recently during the pandemic, and could do so again if business gets tough.
From an income perspective, the 6% Lloyds dividend yield does attract my attention. But I would rather invest in other businesses right now I think may be less affected by weakness in the housing market. So I have no plans to invest in the bank.
