Lloyds (LSE:LLOY) shares are among some of the most popular investments among UK investors. And it’s not entirely hard to understand why. After all, the banking giant serves a mission-critical role within the UK economy that gives it several desirable defensive traits. And pairing that with a tasty-looking 4.2% dividend yield, snapping up some shares could be a terrific way to unlock a reliable and consistent passive income.
So let’s say an investor wants to earn £1,000 a month from Lloyds dividends. How many shares do they need to buy? And is it actually a good idea?
Crunching the numbers
In 2024, Lloyds paid out 3.17p per share in dividends. But if the analyst forecasts are correct, that could jump to 3.49p by the end of 2025 – something that’s looking increasingly likely given the interim payment enjoyed a similar 15% boost.
If the goal is £1,000 a month, or £12,000 a year, at 3.49p, an investor will need to buy 343,840 shares. And at today’s stock price, such an investment would cost around £269,000. Obviously, that’s not pocket change. But by drip-feeding money in over time and reinvesting any dividends received along the way, investors could eventually build such a position and go on to enjoy an extra grand each month.
Is Lloyds a good investment?
Before setting off on the quest to buy almost 350,000 Lloyds shares, it’s essential to analyse both the risks and potential rewards.
On the bull side of the argument, there’s a lot to like about this business. The higher interest rate environment has helped bolster lending margins. In turn, the balance sheet‘s now flooded with liquid assets that comfortably exceed regulatory requirements. And while interest rates are steadily being cut, the impact is being offset by higher lending volumes, especially when it comes to mortgages.
That’s good news for cash flows and, in turn, dividends. But like every investment, there are key risks to consider, the most prominent of which is regulatory and legal uncertainty. Changes in banking rules and the discovery of financial scandals – something the banking industry is notorious for – can have a massive impact on the business.
An increase in regulatory capital provisions, or issued legal penalties, could gobble up free cash flow, potentially disrupting dividends as well as the Lloyds share price. At the same time, an economic slowdown in a lower interest rate environment may also hamper borrowing activity from customers. And with fewer loans being issued, there’s less cash flow to offset the compression of Lloyds’ net interest income.
The bottom line
All things considered, Lloyds shares appear to offer an appealing dividend backed by a robust financial position. But the business is also weighed down by UK macroeconomic and regulatory uncertainty that could prevent the stock from living up to expectations.
Investors who are comfortable taking on these long-term persistent risks, the stock could be worthy of closer inspection. But personally, I think there are other more attractive passive income opportunities than investing in Lloyds shares.
