With interest rates finally rising in recent years, Lloyds (LSE:LLOY) shares have enjoyed refreshed popularity among British investors. The bank’s always been a UK favourite due to its size and stability. Yet since the start of 2024, the share price has also started to rise, climbing by more than 20%, with dividends also getting hiked.
That certainly sounds like a promising trait for income investors. So what lies in store for Lloyds’ dividend according to analyst forecasts? And should I be considering this business for my income portfolio?
A rising dividend
Following its half-year results, Lloyds bank announced a hike to its interim dividend, from 0.92p to 1.06p. And this welcome boost subsequently pushed the yield to a chunky 4.9% at today’s prices. That’s firmly ahead of the FTSE 100’s current 3.5% yield. And looking at the latest forecasts, it seems to be on track to grow even higher.
| Year | Dividend Per Share | Dividend Growth | Dividend Yield |
| 2024 | 3.18p | 15.2% | 5.4% |
| 2025 | 3.66p | 15.1% | 6.2% |
| 2026 | 4.21p | 15.0% | 7.1% |
| 2027 | 4.63p | 10.0% | 7.9% |
| 2028 | 5.09p | 9.9% | 8.6% |
Forecasts always need to be taken with a pinch of salt. They’re dependent on a lot of assumptions that are by no means guaranteed to pass. Nevertheless, the prospect of double-digit dividend growth paired with an 8.6% future yield’s undoubtedly exciting. So what’s driving this?
The power of interest rates
Now that the Bank of England has started cutting interest rates, it may sound logical that Lloyds is set to suffer. After all, the bank makes its money by charging interest on loans. So surely the higher the rates, the better? Well, not quite.
A rising problem that started to emerge is the threat of defaults. After interest rates were hiked so sharply, many customers on variable-rate loans simply couldn’t keep up. In the meantime, businesses began cutting costs and delaying large projects due to the higher price of debt.
Now that rates have started to fall, these delays are falling with them. In other words, debt‘s becoming more affordable, driving up demand and creating opportunities for Lloyds.
We’ve already started to see this being reflected in the financial results, with £2.7bn of new loans issued in the first half of 2024. And if projections are accurate, this figure will rise even higher in 2025. At the same time, the group appears to be on track to delivering its £1.2bn cost savings later this year. And that opens the door to higher margins, even as interest rates continue to fall.
Time to buy the shares?
There’s a lot to be positive about this bank. Yet, it’s not without its weaknesses. The Financial Conduct Authority’s currently sniffing around regarding commissions on motor financing policies. But even if the regulatory investigation finds no wrongdoing, that doesn’t change the fact Lloyds isn’t largely in control of its own destiny.
The bank’s highly dependent on the state of the British economy and monetary policy, neither of which it has control over. Suppose another spanner is thrown into the works? In that case, the current dividend forecast may prove inaccurate, leaving investors with a smaller passive income than expected.
Personally, this lack of control doesn’t entice me to add this business to my portfolio, even with the seemingly bullish outlook over the next five years.
