Annual growth of 12%! Here’s the 3-year dividend forecast for the Lloyds share price

On the day that the Lloyds share price goes ex-dividend, our writer considers how much passive income he might receive over the next three years.

| More on:
Number three written on white chat bubble on blue background

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Lloyds (LSE:LLOY) share price has been doing very well lately. Since announcing its 2023 results on 16 February, the bank’s stock has risen more than 25%.

But today (11 April) it goes ex-dividend. Those buying shares will not be entitled to receive the final dividend in respect of the year ended 31 December 2023 (FY23). This means — all other things being equal — the share price should fall by 1.84p, the value of the final payout.

Ex-dividend day is always a timely reminder as to why I own shares in the bank. I’m not expecting huge capital growth, although that would be nice. Instead, I’m looking for a steady and reliable stream of passive income. Presently, the stock’s yielding over 5%. This compares favourably to the FTSE 100 average of 3.9%.

Looking ahead

And according to analysts’ forecasts, the dividend is expected to grow annually by an average of 12.4% over the next three years.

If these estimates are correct, I should receive payouts of 3.15p (FY24), 3.52p (FY25), and 3.92p (FY26).

Based on these figures, a sum of £20,000 invested today — the most that can be put into a Stocks and Shares ISA in the current tax year — would generate £3,996 in dividend income in respect of the bank’s next three financial years. That’s a total return of 20%, and far more than I’d expect to earn from one of Lloyds high-interest savings accounts.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Of course, these forecasts could be wrong. And dividends are never guaranteed. But I’m hopeful that the stock will give me the generous second income that made me want to invest in the first place.

Earnings potential

However, looking at the analysts’ predictions gives me another reason to be optimistic. Presently, Lloyds stock is valued at 6.8 times its 2023 earnings per share (EPS). If the forecasts of the ‘experts’ are accurate, EPS should rise to 8.72p, in FY26. Maintaining the same earnings multiple as now would imply a share price of 59p. That’s approximately 11% higher than it is today.

It’s also possible that the stock could attract a higher valuation given that a share price of 59p in 2026, and a dividend of 3.92p, would give a yield of 6.6%. But when it comes to the Lloyds, I try not to get too carried away.

That’s because looking at the five-year price chart reminds me that it’s had a turbulent few years. Banking stocks tend to have volatile earnings as their performance tends to mirror that of the wider economy. For banks, higher interest rates are a double-edged sword. Although they help earnings and margins, they also increase the likelihood of loan defaults.

Lloyds derives nearly all its income from the UK, which makes it particularly vulnerable to a domestic downturn. However, most economists are predicting a return to growth this year for the economy, albeit at a relatively modest rate.

That could be why, according to data compiled by Refinitiv, 10 brokers are recommending the stock as a ‘buy’ to their clients. However, it should also be noted that five are giving it a ‘neutral’ status and one is advising to ‘sell’.

Despite the risks, I plan to keep my shares for the foreseeable future, hoping to bank some generous dividend cheques from time to time.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Here’s how I’d target a £5,900 second income by investing £50 a week

We don't need a huge pile of cash to earn a second income. Here's one way I'd aim for it…

Read more »

Grey cat peeking out from inside a cardboard box in a house
Investing Articles

Recently released: May’s small-cap stock recommendation [PREMIUM PICKS]

We believe the UK small-cap market offers a myriad of opportunities across a wide range of different businesses and industries.

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’m listening to Warren Buffett and buying bargain shares!

Our writer has been taking lessons from the investing career of Warren Buffett. Here's how he's using it to try…

Read more »

Close-up of British bank notes
Investing Articles

Here’s how I’d spend £6,900 on income shares to try and earn £500 per year

Christopher Ruane outlines some of the investment principles he'd apply when trying to earn £500 of dividends annually by spending…

Read more »

Newspaper and direction sign with investment options
Investing Articles

My 3 picks for the best UK shares to buy in June

Mark David Hartley is bullish about the UK stock market right now. He reckons these are the three best shares…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

23% per annum: is this FTSE 250 stock too good to turn down?

FTSE 250 constituent Games Workshop has posted an impressive return over the last five years. This Fool takes a closer…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Up 60% in a month, could this UK share keep soaring?

After this UK share surged by almost three-fifths in a matter of weeks, this writer has been re-examining the investment…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

I’m up 25%! The Nvidia share price and other giants power this UK investment trust

I drip-fed some money into this not-so-buoyant UK investment trust and now the Nvidia share price is helping to drive…

Read more »