I hold Lloyds (LSE: LLOY) shares and I think they’re great. They’re up almost 75% since I bought them 18 months ago. Factor in my reinvested dividends, and the total return is nudging 97%.
That’s a pretty decent haul from a big FTSE 100 stock that’s often overlooked in favour of flashy US tech. Sometimes I think investors forget just how rewarding UK blue chips can be.
I wasn’t just chasing growth. Before the financial crisis, Lloyds was seen as a dividend machine. It looked ready to resume that mantle, yielding around 5.5% when I bought it.
FTSE 100 revival
It was cheap too, with a price-to-earnings ratio of around six or seven. That gave the stock room to grow and offered a cushion against nasty surprises.
Better still, Lloyds had rediscovered its dividend mojo, yielding around 5.5%. It was steadily profitable, generating plenty of spare cash. I figured payouts would rise.
I knew Lloyds wasn’t the high-growth bank it once was. Since the financial crisis, it’s settled into a simpler role, sticking to retail banking, small business loans, mortgages, and the like. Less exciting, but less risky.
That suited me just fine. I was thinking long term – 10, 20 years – giving the share price time to rise and dividends time to compound. So to have almost doubled my money in under two years has been a pleasant surprise.
Bouncing back
The Lloyds share price is now up 45% over one year and 147% over five. Investors were even happy to shrug off what looked like disappointing full-year results in March.
Pre-tax profits fell 20% to £5.97bn, below expectations. Its net interest margin dipped to 2.95%. The board also set aside another £700m to cover motor finance commission complaints, taking total provisions above £1bn.
That would usually knock a stock. But shareholders swallowed the lot, helped by the sugar rush of a £1.7bn share buyback.
Lloyds is even holding up as inflation proves sticky and with the UK economy still struggling.
Yield has slipped
The shares aren’t as cheap as they were, trading at just over 12 times earnings. And the forecast yield for 2025 has slipped to 4.38%, mostly thanks to the booming share price.
At today’s price of just under 78p, a £20,000 Stocks and Shares ISA investment would buy 25,641 shares. With Lloyds forecast to pay a dividend of 3.59p this year, that’s income of £920. Not bad in year one.
Markets expect payouts to rise further. Next year’s forecast yield is 5.24%. If all dividends are reinvested the income will climb for two reasons. First, because payouts increase, second, because investors own more shares.
That’s the magic of compounding. Add in any share price growth and the total return can really snowball.
I doubt Lloyds shares will keep rising at this pace. They’ve had a great run. Also, inflation is edging back up and so are mortgage rates, which could hit demand and even increase impairments. On the other hand, if interest rates fall, that could squeeze profit margins. Lloyds could find the going sticky either way.
But in a sense, that doesn’t matter. Share prices rise and fall, that’s just what they do. What counts is the overall direction over time. I’ve made a flying start, but the real gains should build slowly over time.
