I love my Lloyds (LSE: LLOY) shares. I bought a stake in the FTSE 100 bank’s fortunes in June and September 2023, and my only regret is that I didn’t buy more.
In recent years, the Lloyds share price has been performing more like a penny stock than a blue-chip. It’s up 38% over the last year, and 213% over five years. If I was being picky, I could complain that it’s a sector laggard, as rivals Barclays and NatWest did even better over the same time periods. But that would be rude.
The banking sector’s finally swung back into favour, as investors wake up to just how profitable they can be. Provided management doesn’t get overly greedy and blow it all.
FTSE 100 banks are flying
Personally, my shares are up 86% since I bought them, which is far better than I would have imagined. So far, I’ve received five dividend payouts, the latest on 11 September, and re-invested every one. That’s lifted my total return to around 115%.
In total, I now hold 10,240 shares, of which 981 I bought with reinvested dividends. They now account for almost 10% of my total stake, a percentage that will grow over time. Provided the dividends keep flowing.
When announcing its half-year results on 24 July, Lloyds increased its interim dividend by 15%. That’s way above the August inflation rate of 3.8%. So it’s rising in real terms.
In 2024, the board paid a total dividend of 3.17p. Analysts now forecast that will rise 10.4% to 3.5p per share in 2025, and by 14.5% to 4.01p in 2026.
That would suggest a forward yield of 4.75% in 2026. I expected that number to be higher, but the Lloyds share price has climbed rapidly lately, which automatically shrinks the yield. It’s hard to complain about that though.
Shareholder payouts ahead
Can this continue? Lloyds has to keep generating the cash to afford that. Things are humming along nicely, with first-half profits up 5% to £3.5bn, beating forecassts.
However, if interest rates continue to fall, that could squeeze net interest margins, the difference between what banks pay savers and charge borrowers. Profits could be squeezed as a result.
Lloyds has also had to set aside an extra £800m to cover claims costs for the motor finance scandal, lifting the total provision to £1.95bn. That didn’t seem to worry markets too much. It helped that earlier this year the board announced a £1.75bn share buyback, which suggests it’s not short of cash today.
Another risk is that big banks get hit for a windfall tax in the November Budget, which could knock their appetite for paying dividends.
There are longer-term risks to the income too. We could get hit by another financial crisis, a stock market crash, or a host of other nasties we can’t predict.
It would be presumptuous to expect my dividend to keep rolling forever. But I’m still optimistic and think the shares are well worth considering today, especially given the relatively modest price-to-earnings ratio of 13.4. As ever, investors should take a long-term view.
