It’s perhaps no surprise that Lloyds (LSE:LLOY) shares are tipped to continue paying market-beating dividends over the medium term.
Sure, the UK economy may be in the doldrums. But a strong balance sheet, underpinned from the regular repayments it gets from loan and credit card customers, provide a strong basis for it to keep paying large dividends.
So at 49.4p per share, Lloyds’ current share price carries a healthy yield of 6.2% for 2024. This is far ahead of the FTSE 100‘s 3.8% forward average.
For 2025, the Black Horse Bank’s yield marches to 6.8% too. So should I buy Lloyds shares for passive income?
Trouble brewing
It’s impossible to talk about cyclical bank stocks without mentioning how tough the trading landscape is today.
High street operators have continued to rack up massive credit impairments (Lloyds booked another £308m in 2023, though this was down from £1.5bn a year earlier). And as the economy splutters and unemployment rises, these charges look set to keep accumulating.
This week charity Debt Justice announced a record 6.7m people are “in financial difficulty“. It followed Insolvency Service news that personal insolvencies hit 10,136 in February, up 23% year on year.
Rising impairments aren’t the only problem in the current environment either. Banks could also struggle to grow revenues as consumers and businesses struggle. And net interest margins (NIM) look poised to fall should — as expected — the Bank of England begins slashing interest rates from late spring/early summer.
In good shape
On the plus side, these factors may not hinder Lloyds’ ability to make good on current dividend forecasts.
For one thing, predicted dividends are well covered by anticipated earnings over this period. Dividend cover sits in and around the safety benchmark of 2 times.
Secondly, the business has a robust balance sheet it can use to pay those large dividends. Its CET1 ratio stood at 13.7%, which was also 70 basis points ahead of its target.
Lloyds’ decision to buy back another £2bn worth of its shares underlines its financial strength. So even if those aforementioned issues hamper profits, the bank (on paper at least) may still have enough wiggle room to meet payout estimates.
Here’s what I’d do now
Does this make Lloyds’ shares a strong buy for passive income though? To be honest, I’m not so sure.
As an investor, I’m searching for more than big dividends from a stock. I’m looking for companies that could also provide me with solid capital gains. And I’m not convinced the FTSE firm can do this.
As the chart above shows, Lloyds’ share price has taken off in recent weeks. But it remains more than 20% lower than it was five years ago.
With the economic outlook remaining extremely bleak — and interest rates tipped to return to their sub-1% norms — it’s tough to see how the bank will break out of its long-term downtrend.
In fact, I wouldn’t be surprised to see Lloyds shares correct in the coming weeks and months. I find the buzz around its shares hard to understand given the ongoing issues described above.
For these reasons, I’m planning to leave the banking stock on the shelf and buy other FTSE dividend shares instead.
