Lloyds (LSE: LLOY) shares hold centre stage in my self-invested personal pension (SIPP) and I don’t expect that to change. I hope to hold them for life.
I can’t guarantee that’ll happen. Even solid blue-chips like Lloyds can collapse. It would have gone under during the financial crisis, if the taxpayers hadn’t stepped in with £20.3bn.
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Today, it’s a modest domestic operation, focused on personal and small business banking. But what it’s lost in excitement, it’s gained in reliability.
FTSE 100 dividend star
That hasn’t stopped the shares from climbing 38.58% over the last 12 months. Throw in a trailing dividend yield of 4.73%, and that’s a total return of 43.31%.
Holding Lloyds shares is riskier than sticking money in the bank. My capital could fall instead of grow. Dividends aren’t guaranteed either. Both depend on Lloyds making profits and keeping the cash flowing.
Lloyds is plugged into the UK economy and right now and things are looking up. GDP grew 1.3% in the first half of this year. The Bank of England’s cut interest rates once, and may cut them twice more in 2024.
Lower rates will be a mixed bag for Lloyds. On the plus side, they should revive the housing market. Lloyds is the UK’s biggest lender, so this could be a real boon. But there are potential negatives too.
Falling interest rates will hit net interest margins, the difference between what Lloyds pays savers and charges borrowers. The squeeze has begun. First-half results published on 25 July showed margins narrowed from 3.18% to 2.94%. Profits fell 14% to £3.2bn. Higher operating expenses didn’t help.
In full-year 2023, Lloyds paid a total dividend of 2.76p per share in total. That’s expected to hit 3.1p in 2024, I rise of 12.4%.
Blue-chip growth
Let’s say I’ve had enough of working and want to retire. According to the Pensions and Lifetime Savings Association, a single person needs £31,300 a year to have a ‘moderate’ income in retirement. I’m not single, but let’s keep this simple.
I’m on course to get the full new State Pension, currently worth £11,502. That leaves me needing another £19,798.
To generate that purely from Lloyds alone, I’d need to buy 638,645 shares (based on its forecast dividend of 3.1p per share). At today’s price of 58.34p, that would cost me a thumping £372,585. Which, strangely enough, I don’t have to hand right now.
Even if I did, I wouldn’t put it all into one stock, even one as solid as Lloyds. I’d aim to supplement the income it pays with a few stocks offering higher yields. If my portfolio as a whole yielded 6%, I’d get the same £19,798 income from £329,967. That’s £42,618 less. Any share price growth will be on top of that.
My income should rise also over time as companies increased their dividends.
This gives me an indication of the size of pot I need to fund a decent retirement income from FTSE 100 shares. I’m not there yet, but should be by the time I retire. And my Lloyds shares have a key role to play.
