Banks like Lloyds (LSE:LLOY) are popular shares with investors seeking a dependable dividend income.
The fees they charge and loan interest they receive provide a steady flow of cash they can return to shareholders. Their strong capital ratios (as demanded by industry regulations) also give passive income hunters confidence that dividends are well supported.
Finally, their revenue streams across product classes also help provide protection during downturns. Lloyds is a market leader across multiple segments including mortgages, personal and commercial banking and savings.
Dividends at the FTSE 100 bank have risen strongly since the Bank of England restricted them during the Covid-19 pandemic. It’s a trend City analysts expect to continue.
A £1,073 passive income
For 2025, dividends on Lloyds shares are expected to rise another 12.9% year on year, to 3.58p per share. This creates a 4.3% forward dividend yield, ahead of the broader Footsie average of 3.2%.
As you can see, dividend growth is tipped to accelerate over the next three years, too, driving the dividend within a whisker of 6%.
| Year | Dividend per share | Dividend growth | Dividend yield |
| 2026 | 4.12p | 15.1% | 5% |
| 2027 | 4.8p | 16.5% | 5.8% |
Based on these estimates, a £10,000 investment in the Black Horse Bank now will deliver a total passive income of £1,073 across 2026 and 2027 alone.
Strong forecasts
Yet earnings and dividend forecasts are never guaranteed. So we need to consider how robust current estimates are.
My overall opinion is a positive one. Let’s consider the strength of Lloyds’ balance sheet to begin with. A CET1 capital ratio of 13.8% as of June remained comfortably above the regulatory minimum of 12%.
The bank is targeting a ratio of 13% by the end of 2026 “to grow the business, meet current and future regulatory requirements and cover economic and business uncertainties”. That leaves ample headroom for generous capital returns between then and now.
I’m also encouraged by the level of dividend coverage on Lloyds’ shares over the short-to-medium term. Predicted payouts are covered between 2.1 times and 2.4 times by forecast earnings through to 2026.
Any reading above 2 times provides a wide margin of error.
Is Lloyds a buy then?
A strong balance sheet and healthy dividend cover is crucial in the current economic climate. Strength on both counts makes me optimistic the bank can deliver on the City’s dividend expectations.
But does that make the Lloyds shares a buy to consider? In my view, the answer is no.
Despite qualities like impressive brand strength and an improving digital offering, the bank faces significant hurdles that could hit its share price, offsetting the appeal of more juicy dividends.
The prospect of a deep and prolonged economic downturn in the UK is significant, one that could weigh on loan growth and lead to heavy impairments.
Competition is also fierce and getting tougher, putting sales and margins under pressure. The bank’s net interest margins (NIMs) are already under threat given the likelihood of further interest rate cuts.
Finally, retail banks like Lloyds could be subject to a crushing windfall tax in November’s Budget. This event alone could pull share prices sharply lower.
My feeling is that these threats aren’t reflected in the 51% share price rise in 2025. If these threats intensify, it could spell a sharp reversal that could offset more market-beating dividends. I’d rather buy other passive income stocks today.
