I’m so glad I bought Lloyds (LSE: LLOY) shares in June and September 2023. It was one of the very first stocks I targeted when loading up my brand-new Self-Invested Personal Pension (SIPP), which I set up after transferring three legacy pension schemes.
The big FTSE 100 banks have all been on a tear since then. The Lloyds share price is up 67% over the last year, and 125% over two.
Personally, I’m up 96%, which is a fantastic capital return from a blue-chip that took years to shake off the grim legacy of the financial crisis. It shows how FTSE 100 shares can really fly, especially if investors get lucky with their timing, as I did.
High-flying FTSE 100 sector
I’ll argue it wasn’t all dumb luck. I thought the shares were priced to grow when I bought them, at a bargain price-to-earnings (P/E) ratio of around seven. That’s roughly half the fair value number of 15, while the price-to-book ratio was down to 0.4, well below the figure of 1 seen as fair.
Lloyds was also forecast to yield 5%, a nifty rate of income. I also believed UK dividend stocks would become more popular as central banks started cutting interest rates, cutting yields on safe sources of income such as cash and bonds.
So far, I’ve received five dividend payouts from Lloyds, all automatically reinvested. Including them, my total return is 128%, which shows the power of compounding dividends. And they’re only just getting started.
Over time, my reinvested dividends will buy more and more shares, which will generate still more income.
Modest valuation today
My only regret is not buying more Lloyds shares. Could I put that right by purchasing more today? The shares are more expensive now with a P/E of 14.1, althought that’s still decent. The rising share price has pushed the trailing yield down to 3.56%. That said, forecasts suggest it will climb to 4.04% in 2025 and 4.66% in 2026.
In fact, I’ll be doing better than that. Today, the shares cost 89.1p. My average purchase price was just 45.34p. Based on that, the 2025 dividend gives me a personal forecast yield of 7.9%, and in 2026 the yield is 9.1%. By 2027, I could be receiving 10.5% of my original investment in income alone.
This is a reminder of the joys of holding FTSE 100 dividend stocks for the long-term.
Potential risks
Dividends aren’t guaranteed, of course. Lloyds must generate the cash to pay them. Also, share prices can be volatile and as we saw in the financial crisis, banks can be their own worst enemies. Further interest rate cuts could squeeze net interest margins, while talk of a windfall tax on banks in this month’s Budget could cut profits.
Despite these concerns, I think Lloyds shares are worth considering (although maybe after we know what the Budget brings). I’d love to buy more but one thing is stopping me. Lloyds is the only FTSE 100 bank I own. Rather than doubling down, it might be wise to consider buying either Barclays or NatWest, for the sake of diversification. Lloyds isn’t the only stunning UK bank worth considering today.
