£20,000 invested in Lloyds‘ (LSE: LLOY) shares two years ago would be worth £44,509 today, including dividends. That is a gain of £20,417 on the share price, plus another £2,842 from dividends, giving a total return of 123%!
The exceptional figures have been driven by stronger earnings, firmer margins and consistently robust credit performance across the bank. But forecast increases in its profits and a major gap between the share’s price and its value point to more to come.
So what sort of returns might investors be eyeing in the coming months and years?
What are the potential share price gains?
Discounted cash flow (DCF) analysis remains the clearest way to estimate where a stock ‘should’ trade, in my view. It does this by projecting future cash flows and translating them into today’s money.
Naturally, the less certain those forecasts are, the higher the return investors demand — and the heavier the discount becomes. Analysts’ DCF models differ, with some more bullish than mine and others more restrained.
But using my own assumptions — including an 8.3% discount rate — Lloyds screens as 47% undervalued at its current 97p price. That points to a fair value of £1.83 — nearly double the current price.
So if the stock continues drifting toward fair value over time, this could be a superb opportunity if those DCF assumptions hold.
Are dividend returns going up too?
Analysts expect Lloyds’ dividend yields to rise to 4.3%, 5.1%, and 5.4% respectively from this year to 2028. These sit comfortably above the present 3.1% average of the FTSE 100, although they could go down as well as up over time.
Using the forecast 5.4% return, a £20,000 holding in the bank would make £80,695 in dividends after 30 years — the end of the standard long-term investment cycle. By that point, the shares’ total value would be £100,695.
And this would generate a yearly income of £5,438 from dividends alone.
What’s going to drive shareholder gains?
Steady expansion in a company’s earnings underpins lasting gains in its share price and dividends. A risk to Lloyds is a slower UK economy that could soften demand for loans and financial products. Another is rising competition across its key mortgages, savings and digital banking divisions.
Nevertheless, analysts forecast its earnings will surge by an average 12.4% a year to end-2028 at minimum. Indeed, its Q1 2026 results released on 29 April saw profit before tax surge 33% year on year to £2bn.
Management also reiterated its key profitability target — return on tangible equity — of over 16% for the full year.
My investment view
The past two years have shown what Lloyds can deliver, with earnings, margins and credit quality all moving in the right direction. And the forecasts suggest that momentum is not finished yet.
The shares are still trading well below fair value on DCF measures, and dividends look set to rise. Meanwhile, analysts expect double‑digit earnings growth over the medium term at least.
I already hold two banking stocks — HSBC and NatWest — so adding another would unsettle the risk/reward balance of my portfolio. But for those without this conflict, Lloyds looks well-positioned to keep rewarding patient and savvy investors and is worth considering.
For me, other deeply undervalued, high-yielding stocks have recently caught my attention.
