Lloyds Banking Group (LSE: LLOY) shares have finally had a decent year, up 13% so far in 2024.
But is that good news for dividend investors? Well, maybe not. At least not for those of us who want to keep buying more and bagging the best dividend yields we can.
The share price rise this year has dropped the forecast dividend yield to 5.7%. But I won’t complain, as it’s still a cracking yield. What do the next few years hold?
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Bank liquidity
Lloyds raised this year’s interim dividend by 15% from the same period last year, based on what it described as its “strength of capital generation and CET1 position“.
The CET1, or Common Equity Tier 1, ratio is a key bank valuation metric. It’s a measure of core capital including things like retained earnings and common stocks. We’re talking assets that are easily converted to cash, and it gives us an idea of how well a bank could handle a downturn.
Lloyds’ CET1 of 14.1% at the halfway stage was strong, and should easily be enough to satisfy the Bank of England’s stress tests.
For the full year, Lloyds expects it to come in at 13.5%. And by 2026 it reckons it will pay it down to about 13%. It all suggests to me that Lloyds should have no trouble meeting its dividend goals.
What the brokers say
Broker forecasts show the Lloyds dividend rising by 5.8% in 2025, for a potential yield of 6.0%. And a further 17% hike mooted for 2026 would lift it as high as 7.0% based on the current share price.
If the analysts are right, we should see the 2024 dividend covered 2.1 times by earnings per share (EPS). They expect EPS to dip in 2025, dropping the cover to only around 1.9 times. But then a return to strong EPS growth in 2026 could lift it close to 2.3 times.
Again, this all looks healthy to me. But are there any risks that could derail Lloyds’ dividend ambitions? There are.
Dividend danger
Interest rates are still high and inflation has blipped up again, to 2.3% in October. Companies are already warning that the latest Budget could drive up prices.
Couple that with a tough economic growth outlook, property market unceratinty, increasing trade wars, geopolitical threats… I fear it could all hold back the finance sector that a fair portion of my investment performance depends on.
And there’s a new mis-selling crisis unfolding. This time it’s driven by claims related to motor finance. Lloyds is big in car loans.
Buy, sell, or what?
We’ve seen pessimistic predictions that mis-selling investigations could land Lloyds with a bill of over £3bn. And that could send all these forecasters back to the drawing boad.
But even with these clouds on the horizon, Lloyds remains one of my top potential long-term cash cows.
I probably won’t top up my holding just yet, though. I might wait and see how 2025 starts to unfold.
