Retail banks like Lloyds (LSE:LLOY) are among the most popular shares out there for dividend investors. They’re known for their generous payout ratios and the predictable cash flows they enjoy from essential everyday products like loans, current accounts, and credit cards.
Since 2020, this FTSE 100 share has paid total dividends of 10.9p per share. It’s delivered healthy cash rewards even though — like other UK banks — it was forced to suspend dividends by regulators during the pandemic.
This means that someone who invested £10,000 in Lloyds shares at the start of the decade would have made a total passive income of around £1,715.
Dividends have risen sharply since the depth of the Covid-19 crisis. But can the bank maintain its recent impressive momentum?
Dividend growth
It’s important to remember that dividends are never guaranteed. But encouragingly, the 17 brokers with ratings on Lloyds expect cash payouts to keep rolling (and climbing) at least to 2027.
| Year | Dividend per share | Dividend growth | Dividend yield |
|---|---|---|---|
| 2025 | 3.46p | 9.1% | 4.6% |
| 2026 | 4.12p | 19.1% | 5.5% |
| 2027 | 4.68p | 13.6% | 6.2% |
Indeed, predictions of blistering dividend growth mean yields rise rapidly above the broader FTSE 100’s long-term average of 3-4%.
These positive forecasts reflect analysts’ expectations of breakneck profits growth over the period. Earnings per share are tipped to rise at an average of 21% a year through to 2027.
Based on current earnings projections, I’d say Lloyds’ dividend projections look pretty secure. Dividends for the next three years are covered between 2.1 times and 2.4 times by anticipated earnings. These figures sit comfortable above the accepted safety watermark of 2 times.
On top of this, the bank has deep pockets it can call upon to maintain its ultra-progressive dividend policy if profits disappoint. Its Common Tier Equity (CET) 1 ratio was 13.5% as of March, above the target of 13% it’s planning for by the end of 2026.
Car crash
Yet while I’m confident in current dividend forecasts today, things could change quickly depending on a Financial Conduct Authority (FCA) investigation into the motor finance industry.
In a nutshell, loan providers — of which Lloyds is one of the country’s biggest — face billions of pounds in fines if the Supreme Court upholds an earlier ruling that ‘secret’ commissions to car retailers are unlawful.
Lloyds has set aside £1.15bn to cover possible costs, but some analysts think it could potentially run into tens of billions. As with the payment protection insurance (PPI) scandal earlier this century, the implications on lenders’ profits and dividends could be severe.
Is Lloyds a buy?
Risk averse investors may be waiting until the Supreme Court makes its ruling in July before buying Lloyds shares. In my opinion, I think they should consider avoiding the Black Horse bank regardless of the court’s findings.
Lloyds faces multiple profits challenges that could impact share price performance and dividends in the coming years. Loan growth and credit impairments could disappoint if the UK economy struggles. Margins are also under mounting pressure as interest rates fall and market competition heats up.
On the plus side, the company stands to benefit from robust conditions in the UK housing market. But on balance, I think it poses too much risk for me to consider, even accounting for analysts’ bright dividend estimates.
