Lloyds (LSE:LLOY) shares are hugely popular with investors seeking passive income. A quick glance at the bank’s recent brilliant dividend record shows exactly why.
Lloyds didn’t pay a dividend in 2020 under Bank of England pandemic guidelines. Since then, they’ve risen at a stunning annual growth rate of 16.3%. And City analysts are expecting them to keep soaring over the medium term.
If forecasts are correct, a £20,000 investment in Lloyds shares today will provide an £851 dividend income this year alone. The question is, how realistic are current payout estimates? And should investors consider buying the FTSE 100 bank anyway?
Rising dividends
Last year, Lloyds paid a total dividend of 3.65p per share. Analysts are expecting this to rise to:
- 4.23p in 2026
- 5.01p in 2027
- 5.71p in 2028
Dividends are never, ever guaranteed. But if these predictions are accurate, it adds up to a fat stack of cash — with dividends reinvested, a £20k lump sum today would deliver a total passive income of £3,160 over the period.
At Lloyds’ current share price of 99.4p, dividend yields range from 4.3% to 5.7% through to 2028. These sail past the long-term FTSE 100 average of 3%-4%.
Strength in depth
So how robust are these calculations, then? In my opinion they’re pretty concrete, and certainly for 2026. Let me explain why.
Firstly, predicted dividends are covered 2.4 times for this year, and 2.3 times for both 2027 and 2028. This is critical, as any number above two provides a margin of error if earnings get blown off course.
And secondly, Lloyds has robust financial foundations it can also use to support its progressive dividend policy. Its CET1 capital ratio currently is 13.2%, above its 13% target after 2025’s increased dividend and fresh buybacks. The bank’s plan to repurchase £1.75bn more of its shares this year underlines its strong balance sheet.
So what’s the catch?
Lloyds is highly sensitive to economic conditions, so these forecasts could be amended, especially those for 2027 and 2028. But unless something catastrophic happens, I expect dividends to land somewhere around what City analysts predict.
But let me tell you a little something: I wouldn’t touch Lloyds shares with a bargepole. Why? When purchasing dividend shares, it’s also important to consider a stock’s share price prospects. And I fear the FTSE 100 company could be overdue for a correction.
Today the bank trades on a price-to-book (P/B) ratio of 1.4. That’s miles above the 10-year average of 0.9, and doesn’t factor in risks such as:
- Rising interest rates that dent revenues and raise credit impairments
- Weak economic growth in its core UK market
- High motor finance misconduct penalties from court cases
- Growing competition from challenger banks and building societies
My fear is Lloyds’ large valuation leaves its shares especially vulnerable to such risks. That’s even as an increase in interest rates would be a boost to its margins.
It’s probable that Lloyds shares could deliver more large dividends over the near term. But these could be wiped out (and then some) if the share price plunges. It’s why, on balance, I’d rather find other passive income stocks to buy.
