Lloyds (LSE:LLOY) shares are among the most popular in the UK for passive income. As the second-largest bank in Britain, many investors, both retail and professional, seem to hold the company inside their portfolios. And on the surface, it’s not difficult to see why.
The company’s been around since 1765, making it one of the oldest publically-traded businesses on the London Stock Exchange. That’s certainly an encouraging sign since it signals longevity, something that all long-term investors want to have. But another factor behind its immense popularity is the dividend.
Even when operating in a low-interest rate environment, the bank’s managed to generate earnings to fund an upward-trending dividend payment scheme. Now that interest rates have been hiked and profit margins expanded, shareholder payouts could be set to grow even further. And with shares priced at low multiples, the yield’s currently hovering just shy of 5%. By comparison, the FTSE 100‘s closer to 3.6% this year.
Given this market-beating payout, how mush passive income would 10,000 Lloyds shares generate for me today? And how does that compare with the UK’s flagship index? Let’s take a look.
Income through dividends
As of this month, the bank’s dividend per share is 2.76p. This means that investors with 10,000 shares in their portfolio are earning around £276 a year. That doesn’t seem like much, but it’s worth remembering Lloyds shares trade at a pretty low price which currently sits at 55p.
Therefore, buying 10,000 shares would cost only around £5,500 – a relatively small sum. And if this money was put into the FTSE 100 instead, the passive income would sit at only £198.
Of course, that’s the passive income being generated right now. If we go back in time to 2003, the bank offered a dividend per share as high as 22.22p. And if dividends where to return to this level, then suddenly 10,000 shares would be generating close to £2,222 each year instead.
Could Lloyds’ dividend return to 22.22p?
Like most retail banks, Lloyds makes its money by accepting deposits and then lending this capital out to individuals for mortgages, or businesses for corporate loans. When interest rates are high, the bank has more flexibility to turn a profit. Therefore, unlike most companies, the recent round of rate hikes from the Bank of England to combat inflation has actually been a bonus for the bank.
In 2003, interest rates sat at 3.75%. That’s actually lower than today’s interest rate of 5.25%. And while interest rate cuts may be coming, current consensus suggests that returning to near-0%’s unlikely. It’s possible that rates may stabilise near this 2003 level. And if that’s the case, could the dividends surge to their impressive historical level?
Sadly, the answer is likely no. While the bank’s profitability is undoubtedly on the rise, there’s one critical factor that’s changed drastically between 2003 and today – the number of shares outstanding.
In 2003, there were just shy of 5.6bn shares floating on the London Stock Exchange. Following the chaos in 2008, that number’s now close to 63.5 billion. While share buybacks have started to reduce this figure, there’s still a long way to go. And until then, the dividend per share’s unlikely to climb back into double-digit territory.
