On 31 January 2025, Lloyds Banking Group (LSE:LLOY) shares were offering a yield of 5.1%. But does the bank’s amazing 2025 share price rally mean there are now better passive income opportunities elsewhere? Let’s see.
Better than expected
On Thursday (29 January), the bank released its 2025 results. Significantly, most key financial performance measures beat analysts’ expectations.
For example, net income was £18m better, profit after tax was £183m higher, and earnings per share was 0.3p ahead of forecast. At 12.9%, Lloyds’ return on tangible equity was 0.6 percentage points better than expected. Also, the bank’s net interest margin of 3.06% was exactly as forecast.
Investors liked what they saw and the bank’s shares closed 1% higher.
All about the money
However, it’s the dividend that’s probably of most interest to shareholders. Again, this beat analysts’ consensus with the total payout for 2025 at 3.65p – an increase of 15% on 2024 — compared to the 3.63p predicted.
But shareholders will have to wait a little longer before receiving the final dividend of 2.43p. This will be paid on 19 May. Those buying £5,000 of shares just before close of business on 29 January will receive a payout of £115.16. But if they retain their shares for a little longer, they will — probably — also receive an interim dividend for 2026.
The amount payable will be known later in the year and recent history suggests it will be paid in September. Analysts are expecting a dividend of 4.23p for the whole year, although they might upgrade this further given the bank’s strong 2026 results. If the current forecast is right, the interim payout for the year is likely to be 1.4p. This means a £5,000 shareholding could earn another £66.35 in dividends in the autumn.
Combined, that would be a total passive income of 3.83p (£181.15) — a return of 3.6%. This is above the current (30 January) FTSE 100 yield of 3.1%. I reckon this is a good return for doing very little. And perfectly illustrates why so many investors are attracted to dividend shares.
My view
Of course, all investments carry risk. If earnings were to fall or another unforeseen problem arises, then the dividend could be cut, or worse, suspended altogether. Indeed, this could happen if the UK economy were to take a nosedive. Inflation has yet to be tamed and growth appears lacklustre. With the bank doing nearly all of its business in this country, it’s vulnerable to a domestic downturn with loan defaults likely to increase.
However, for now at least, everything seems rosy in Lloyds’ garden. As a sign of confidence, it’s announced another £1.75bn share buyback programme.
But even though I remain a fan of income shares and believe Lloyds is a well-run bank with a strong balance sheet, I don’t want to invest. The bank’s incredible 2025 share price rally – it increased nearly 80% — means, in my opinion, its stock’s become expensive.
At the moment, there are 196 members of the FTSE All Share index that offer a higher yield and I believe many of them are likely to deliver more capital growth than Lloyds in 2026. Don’t get me wrong, I think it’s a good dividend share but I think there are lots of better ones to consider.
