I reckon those holding Lloyds Banking Group (LSE:LLOY) shares for passive income would have been delighted with the group’s 2024 results, which were released on 20 February.
That’s because the bank’s going to pay a total dividend for the year of 3.17p a share. This beat the average forecast of the 18 analysts covering the stock. They were predicting a payout of 3.09p (2.6% less). And it’s a 15% increase on the amount paid in 2023.
Prior to the announcement, these analysts were expecting future dividends to be 3.33p (2025), 3.74p (2026), and 4.26p (2027).
Given the increase that’s been announced, I expect these forecasts to be upgraded. Let’s assume they are all increased by 2.6%. The revised figures would then be 3.42p (2025), 3.84p (2026), and 4.37p (2027).
What does this mean?
Assuming a share price of 71p, if these predictions come true, a £20,000 investment made today would generate passive income of £3,276 over the next three years. I chose this figure as this is the maximum annual allowance of a Stocks and Shares ISA. Using this investment product ensures that income and capital gains aren’t taxed.
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However, if the dividends were reinvested buying more shares at a price of 71p, the same lump sum would grow to £23,457. This process is known as compounding and has been described as human kind’s greatest invention.
That’s a three-year return of 17.29%, equivalent to an annual rate of 5.46%. This is much higher than any rate of interest that can currently be earned on one of the bank’s fixed-term deposit accounts.
Sounds good to me.
A health warning
Yet it’s important to remember there are no guarantees when it comes to investing. Dividends can fluctuate from one year to another. It’s not uncommon for payouts to be reduced (or suspended) during difficult times.
This makes it tough to accurately predict the returns to shareholders. In fact, the bank increased its 2024 dividend despite reporting lower earnings than forecast.
Also, it’s unrealistic to assume that the Lloyds share price will be unchanged for three years. Yes, investors will be hoping that it rises, in line with the predictions for the bank’s earnings. However, it may fall. And this could wipe out all of the gains from the passive income.
Final thoughts
Not everyone likes banking stocks. This is reflected in relatively low valuation multiples for the sector. According to McKinsey & Company, the sector has the lowest price-to-earnings ratio of any industry.
But Lloyds has an impressive balance sheet. At 31 December 2024, it disclosed total assets of £907bn, including loans to customers of £459bn. It also held cash of £63bn. In my opinion, it has the financial firepower to keep growing its payout.
For 2024, it returned 50.3% of its earnings to its shareholders by way of dividends. This suggests there’s plenty of headroom should future events not go as planned.
With this in mind, I think those investors looking to earn generous levels of passive income over the next few years could consider Lloyds shares.
