I only started adding Lloyds (LSE: LLOY) shares to my self-invested personal pension (SIPP) in June last year, and they’re already among my favourite holdings.
I got my timing right. After years in the doldrums, the Lloyds share price finally sprang into life. It’s up 32.48% over the last 12 months. It smashed the FTSE 100 as a whole, which grew a relatively modest 10.05%.
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After a strong run, I wouldn’t be surprised if Lloyds shares slowed. First-half profits fell 14% to £3.2bn, due to higher operating expenses and lower net interest income. Net interest margins, the difference between what banks pay savers and charge borrowers, narrowed from 3.18% to 2.94%.
FTSE 100 star
They may narrow further, if the Bank of England cuts interest rates again. The mortgage market is insanely competitive at the moment. As Lloyds is the biggest player, it can’t afford to be beaten on price.
CEO Charlie Nunn said the group is on track to meet 2024 targets though, and expects to hit 2026 strategic objectives and guidance too.
Trading at 57.3p and with a forward price-to-earnings (P/E) ratio of just 9.73 times, I still think Lloyds shares look good value. Its price-to-book ratio is just 0.7, below the value of the assets held on its balance sheet.
Even if the shares do idle for a while, that’s fine by me. I plan to hold them for five, 10, 15 years and with luck much longer. That gives my holding plenty of time to compound and grow. Along the way, I’ll reinvest every dividend I receive.
The trailing dividend has slipped to 4.9%. That doesn’t worry me. It’s still above the FTSE 100 average of 3.78%. Also, shareholder payouts are comfortably covered 2.8 times by earnings, which offers plenty of scope for progression.
Dividend income and growth
In full-year 2023, Lloyds paid a total dividend per share of 2.76p. Analysts reckon payouts will rise at an average annual rate of 12.4% over the next three years. If they’re right, I’ll get 3.10p per share in 2024, rising to 3.49p in 2025 and 3.92p in 2026.
I now own 9,657 shares. If forecasts are correct (and they’re only forecasts), I can look forward to £299.37 worth of dividends in 2024, rising to £377.03 in 2025 and £378.55 in 2026.
In fact, I’ll get slightly more, because I’ll reinvest every dividend. More shares equals more income. I’m guessing £380 in 2026.
I bought my Lloyds shares at an average price of 43.616p. In total, they cost me £4,222 before I charges. If I get £380 income in 2026, including my reinvested dividends, that works out as a yield of 9% based on my original purchase price.
That’s way more than today’s headline rate. Dividends aren’t guaranteed, of course. Lloyds will be forced to cut shareholder payouts if it doesn’t generate enough cash to fund them. Yet if Lloyd sticks with it, I’ll get a brilliant, growing yield. Especially based on what I originally paid. I expect more share price growth along the way, but will treat that as a bonus.
