I added Lloyds (LSE: LLOY) shares to my Self-Invested Personal Pension (SIPP) in June 2023, and topped up my stake that September. In retrospect, it was a good move.
In total, I bought 9,259 shares in the FTSE 100 bank, at an average entry price of around 43p. I invested £4,000 before commission and stamp duty. Since then, the Lloyds share price has climbed by just over 84%, according to my online SIPP.
That should have increased my original £4,000 to £7,360 yet, in practice, I’ve a lot more than that. As I write this, my total stake’s worth £8,560. So where did the extra £1,200 come from?
Experienced investors will know the reason. Lloyds has paid me plenty of dividends in that time and I’ve reinvested every penny to buy more stock.
Brilliant FTSE 100 income stock
Every September and May, Lloyds sends me a cash payment that I can do whatever I want with. And I can’t think of anything I’d rather do with the money than buy more Lloyds shares. I’ve set my trading account to automatically reinvest every penny, so I don’t have to lift a finger.
The latest cash injection of £122.70 hit my account on 9 September. Two days later, I bought another 147 shares at a price of 82.38p each. I also paid 99p in commission and 61p in stamp duty.
Effectively, those shares didn’t cost me a penny. In total, reinvested dividends have bought me 981 shares in Lloyds, lifting my total position to 10,240.
Analysts forecast that Lloyds will pay total dividends of 3.5p per share for 2025, rising to 4.07p in 2026.
My 10,240 shares will pay me total income of £358.40 this year and £416.77 in 2026. Actually, I’ll get slightly more in 2026, because I’ll also earn dividends on the shares I bought by reinvesting the 2025 payout.
Reinvested shareholder payouts
Apologies for running through the mechanics of my modest holding, but I think it underlines an important point. Re-investing dividends is a brilliant way to aim to build long-term wealth.
With luck, dividend income should increase each year, for two reasons. First, the board should aim to hike the shareholder payout every year, as profits rise. Second, shares purchased by reinvesting dividends will themselves earn dividends.
None of this is inevitable. Lloyds has to generate enough cash to fund shareholder payouts. And of course, if its shares fall, as can happen at any time, the capital loss may offset the income gains.
The Lloyds share price has had a solid run. It’s up 40% in the year and 110% over five years. As the economy struggles, profits could come under pressure. If interest rate rates fall, that could squeeze margins. An Autumn Budget tax raid on banks this November won’t help, if it happens.
Despite these risks, I think Lloyds shares are still well worth considering today. Investor should take a long-term view, to give their reinvested dividends plenty of time to compound and grow. And grow.
