FTSE 100 banks like Lloyds (LSE:LLOY) have strong records of paying large and reliable dividends over the last decade. The only blotch on their copy sheets was in 2020, when Covid-19 prompted the Bank of England (BoE) to make banks suspend shareholder payouts.
Banks can be great stocks to buy for passive income. The interest income, product fees and commissions they receive give them predictable cash flows and the financial strength to pay dividends. Their deep capital reserves and diversified revenue streams also provide dividend stability.
Lloyds has a decent record of offering dividend yields above the Footsie average. And despite its rising share price in 2025, it continues to offer index-bashing dividend yields. Predictions of sustained dividend growth leave the Black Horse Bank with yields of 4.4% and 5% for this year and 2026 respectively.
Last year’s total reward is tipped to rise 13% to 3.58p per share in 2025. A further 15% increase is tipped for next year too.
In good shape
It’s important to remember that dividends are never, ever guaranteed. As we saw during the pandemic, even the most financially robust FTSE 100 shares can cut, suspend or cancel dividends at short notice.
Yet barring some once-in-a-generation catastrophe, I’m confident Lloyds can make good on current dividend forecasts. For one, it has a rock solid balance sheet and had a CET1 capital ratio of 13.8% as of June. This was comfortably ahead of its minimum target of 13% and it encouraged the bank to raise the first-half dividend 15% year on year, to 1.22p per share.
On top of this, dividend coverage — which measures how well predicted payouts are covered by expected earnings — is also robust. This provides protection from the impact the UK’s stumbling economy may have on retail banks’ profits.
Dividend cover sits at 2.1 times for 2025 and rises to 2.3 times for 2026. Any reading above 2 times is widely considered to provide a healthy cushion.
However…
This is all extremely attractive for income investors then. But does it make Lloyds shares a buy? For me, the answer’s no.
As I say, Lloyds’ share price has risen sharply in 2025. It’s up 50% in the year to date. But I fear a correction could be coming that offsets the possibility of more FTSE-beating dividends.
Bank shares dropped last week amid rumours that a punishing industry tax could be coming. The Institute for Public Policy Research (IPPR) thinks banks could be hit by as much as £8bn in November’s Autumn Budget. Speculation of a tax raid has risen further following news on Friday (19 September) that government borrowing is at five-year highs.
Lloyds shares are also vulnerable as the UK economy struggles and inflation spikes, overshadowing hopes of sustained revenues growth and falling impairments. Then there’s the problem of rising competition in key segments like mortgages and savings.
On the plus side, BoE’s plan to cool interest rate cuts will give Lloyds’ margins a boost. But on the whole, things are looking increasingly gloomy for Lloyds. Some analysts are tipping a prolonged downturn for the Britain’s economy too, which may impact profits and dividend growth beyond next year.
Despite its dividend appeal, I’m happy to avoid Lloyds and buy other shares for passive income.
