With a trailing yield of 3.16%, Lloyds (LSE: LLOY) shares don’t look that brilliant for income right now. That’s bang in line with the average FTSE 100 yield, yet this is supposed to be one of the great dividend stocks. What’s going on?
Don’t be misled. The dividend is a lot more attractive than the headline yield suggests.
First, yields are calculated by dividing the dividend per share, by the share price. So when the share price rises, the yield automatically falls. It’s pure maths.
The Lloyds share price has been rising, and then some. Over the last 12 months, it’s rocketed 86%. So of course the yield has fallen. Long-term investors won’t be complaining about that.
Still a brilliant income stock
That’s especially so since Lloyds hiked its most recent interim dividend by 15%, well ahead of November’s inflation rate of 3.2%. So in real terms, that income is rising fast.
As a result, the yield will also climb. The forecast yield for full-year 2025 is 3.59%, which already starts to look a little more appealing. For 2026, the forward yield is 4.15%. Again, more progress.
With base rates likely to fall further this year, returns on risk-free assets such as cash and bonds will continue to slide. So it should soon look even better.
Of course, dividends aren’t guaranteed. Companies need to generate enough cash flow to maintain them, year after year. If they fall short, and cut the dividend, the share price will plunge as disgruntled investors move on.
There’s good news on this front. The trailing yield is covered exactly twice by earnings, which is pretty much where companies want to be. The forecast yield is covered 2.4 times. Great — the income looks really solid here.
Of course, earnings could always fall short. Lloyds is exposed to the UK economy, which isn’t exactly firing on all cylinders. Also, falling interest rates could squeeze net interest margins, the difference between what banks pay savers and charge borrowers. This could squeeze Lloyds, and banks across the board.
FTSE 100 star
On the other hand, lower interest rates could also revive mortgage lending, which should be a huge boost for Lloyds as it’s the UK’s biggest mortgage provider, via subsidiary Halifax.
But here’s why I really love Lloyds. I added it to my Self-Invested Personal Pension in early 2023, when the shares traded at 45p. Today, they’re just over 100p. So my capital is up 120%, and after taking into account reinvested dividends, my total return is heading towards 135%.
And the income? Lloyds is forecast to pay a dividend per share of 4.01p in 2026. That’s up 17% from the 3.43p it paid in 2025. Based on my original 2023 purchase price of 45p, I’m looking at a forward yield of 8.9%. That’s the incredible impact of just three years of dividend hikes.
New investors won’t get that yield of course, but give it a few years, and that could be what they’re looking at. This shows the long-term benefits of investing in dividend stocks, and holding them for the long term. And the true value of that supposedly low Lloyds yield.
