Lloyds (LSE:LLOY) shares remain massively popular with investors who are chasing passive income. It’s a situation I’m struggling to understand following the FTSE 100 bank’s stunning price rise this year.
Up 76%, Lloyds’ share price jump has pushed its dividend yield for 2026 to just 4.3%. That’s now barely above the Footsie long-term average of 3% to 4%.
It’s not all bad news!
I’m not saying the bank totally lacks appeal as a dividend share. The predicted 16% dividend hike for next year beats forecasts for almost every other FTSE 100 share.
Lloyds also looks in great shape to meet current payout forecasts. Its CET1 capital ratio is a robust 13.8%. Additionally, next year’s expected cash reward is covered 2.4 times by expected earnings, providing a wide margin of error.
Even so, I think there are still plenty of better passive income shares to consider for next year.
Many quality dividend stocks offer significantly better yields. I also believe Lloyds’ share price could fall heavily next year, given the pressures of rising competition, falling interest rates, and a weakening UK economy.
Three better stocks to consider?
Primary Health Properties is one such dividend share I’d rather buy. This real estate investment trust (REIT) packs a 7.5% dividend yield for 2026, and isn’t sensitive to economic conditions or competitive dangers.
Interest rate movements pose more of a threat. Higher rates depress asset values and raise borrowing costs. But right now, the most likely scenario for 2026 is one of more rate reductions.
A requirement for REITs to pay 90% of yearly profits in dividends provides added appeal for dividend investors.
I’d rather consider Greencoat UK Wind for my portfolio, too. Like Primary Health, earnings can suffer during periods of higher interest rates. They can also come under pressure during calm weather periods when its turbines sit idle.
Yet it’s remained largely a reliable dividend share, reflecting the essential role electricity plays in the economy and the stable cash flows this generates. With its wind farms spread the length of the UK, too, the chances of weather-related disruption are also significantly limited.
The dividend yield here for 2026 is a stunning 11%.
I also believe M&G (LSE:MNG) could be a better dividend stock to buy than Lloyds shares. In fact, it’s near the top of my own shopping list for 2026.
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A FTSE dividend hero
Being a financial services provider, the company — like Lloyds — could suffer if economic conditions worsen. Yet like the bank, its deep balance sheet means such a scenario is unlikely to impact dividend growth.
At 230%, M&G’s Solvency II capital ratio is more than double regulatory requirements. Its robust financial health has underpinned consistent dividend growth since its shares listed on the London stock market in 2019.
I’m not only drawn to M&G shares because of its 7.8% dividend yield. I think it could deliver stunning overall returns over time, thanks to its market-leading positions in growth segments like pensions, annuities, and asset management.
The company is targeting adjusted operating profit growth of at least 5% a year, an encouraging sign for future dividends.
