Lloyds Banking Group‘s (LSE:LLOY) been a retail investor favourite for many years. Some buy the stock for capital growth, others for dividends, and more for a mix of the two. When focusing purely on the income side, what’s the magic number needed to bank an average of £500 each month from Lloyds’ shares?
Doing the maths
Let’s start with the numbers. The stock’s current dividend yield is 3.75%. So if someone wanted to make £6,000 from income over the course of the year, an investor would need to have £160k worth of Lloyds’ stock.
That’s assuming someone invested right now. Going forward, if the dividend per share increases, the amount made from holding the stock could also increase. For example, over the past year, the total dividend paid is 3.65p. This was a bump up from the 3.17p in the previous year, which was also higher than the 2.76p from the year prior.
There’s clearly a trend here. So over time, the person may be able to reduce the total amount of shares needed to be owned in order to generate an average of £500 a month.
The fundamental picture
Aside from the pure numbers, the other point that needs to be addressed is whether the outlook makes sense for the bank to do well. After all, if things go wrong for Lloyds, a dividend cut could prevent the investor from reaching their goal.
From my perspective, the outlook for sustainable dividends is positive. The bank’s benefiting from a higher-for-longer interest rate environment, aided by the likely increase in inflation this year. That might not be great news for borrowers, but it’s good for lenders like Lloyds. In fact, Q1 results from earlier this week showed a 9% jump in net income. This was driven by stronger lending income and an improving net interest margin.
The other reason why I like the bank is that it doesn’t rely on flashy investment banking revenues or risky international exposure. It’s a UK-focused, bread-and-butter lender. As long as the UK economy holds up reasonably well, the bank can continue to churn out solid earnings with strong cash flow. That ultimately translates to growing dividends.
Other alternatives
The bank does have risks, such as the ongoing saga with the car finance scandal. The reputational (and financial) damages still could increase, and so it needs to be monitored closely.
Yet even from the income angle, some might want to target divdiend shares with a higher yield. For example, 11 stocks in the FTSE 250 have yields above 9%.
To hopefully achieve a £500 monthly average payment, the total needed for a 9% yield would be £66.66k. This is much lower than the £150k for Lloyds, but it does have a potentially higher risk.
Yet it serves as a good point to show that even though I believe Lloyds is a good income share for investors to consider, there are plenty of other options out there that might be more suitable for people, depending on their risk tolerance.
