How much do I need to invest in Lloyds shares to earn income of £1,000 a year?

Harvey Jones is getting income and growth from his Lloyds shares but wished he’d bought more of them. So he’s doing some careful sums.

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My Lloyds (LSE: LLOY) shares have exceeded expectations since I started buying them last summer.

First, they didn’t crash. Most of the shares I buy seem to have a bumpy start, before proving their worth over time. Sod’s law strikes me again and again, but not this time.

The Lloyds share price did slip towards the start of the year, as markets accepted we weren’t heading for a heap of interest rate cuts in 2024. Yet it snapped back after the group reported a 57% jump in full-year 2023 profits to £7.5bn in February. With other FTSE 100 bankers such as NatWest Group also booming, markets shrugged off years of scepticism.

FTSE 100 dividend star

A 15% increase in the full-year dividend to 2.76p per share combined with a £2bn share buyback inevitably helped.

Investors were happy to ignore the drop in net interest margins in the final three months of the year, from 3.08% in Q3 to 2.98% in Q4. They largely shrugged off the news that Lloyds had set aside £450m to cover the potential cost for the regulatory probe into mis-sold motor finance. If this turns into the next PPI scandal, it could cost a lot more than that.

In the last 12 months, Lloyds shares have climbed a pretty solid 25.14%, with dividends on top.

At some point, the Bank of England will cut interest rates. That could squeeze Lloyds’ margins further. On the other hand, lower rates would lift the economy, boost the housing market, drive mortgage business, and cut mortgage defaults.

When interest rates fall, savings rates and bond yields will follow. This will make the Lloyds dividend look even more attractive in relative terms. The stock is forecast to yield 5.25% in 2024, and 5.76% in 2025.

Tempting yield

Dividends aren’t guaranteed but Lloyds has a reasonable track record of progression since shareholder payouts were restored after the pandemic. Let’s see what the chart says.

Chart by TradingView

Analysts reckon the Lloyds dividend per share will grow by an average of 12.4% over the next three years. If correct, it will hit 3.10p in 2024, 3.49p in 2025, and 3.92p in 2026. I’m looking forwards to reinvesting every penny.

I currently own 9,657 Lloyds shares. Over the next year, I can expect potential dividend income of just under £300. I sorely wish I’d bought more, especially given how well they’ve done. 

To lift my passive income to £1,000 a year I’d have to hold 32,258 shares in total. Starting from scratch, this would cost me £17,922 at today’s price of 55.56p per share. 

Since I already hold 9,657 shares I only have to buy another 22,610, which would cost £12,557. I’d happily invest that in Lloyds shares today. Despite their strong recent run, they still only trade at 9.75 times earnings.

The UK is finally starting to grow after a bumpy time, and this could help Lloyds, too. I haven’t got £12,557 to hand today, but if I could find, say, £2k, I’d top up my stake and take it from there.

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.

Harvey Jones 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.

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