Why Lloyds Banking Group PLC Is Your Next Great Income Play

LloydsWith a yield of just 1.9%, Lloyds (LSE: LLOY) (NYSE: LYG.US) may not show up on the radar of many income-seeking investors. However, that’s all about to change because, from 2015 onwards, Lloyds is set to become a high-yield share once again (it was before the credit crunch) and should feature on an income-seekers hit list.

Profits At Last

This year should see the end of Lloyds’ misery when it comes to the bottom line. Lloyds has made a loss in each of the last four years, which has meant that paying a dividend has not been possible. However, 2014 is set to be the first year of profitability since 2009 and that means the bank can pay a dividend.

However, the crucial point when it comes to Lloyds’ profitability is that the bottom line is forecast to increase at a rapid rate. For example, Lloyds is expected to earn 7.3p per share in 2014, but this is set to increase to 8p per share in 2015 — that’s an increase of 10%. So, while being profitable after four years of losses is good news, growing profits mean that dividends should grow at a brisk pace, too.

A Higher Payout Ratio

Allied to growing profits is a growing dividend payout ratio (the proportion of profits that are paid out as a dividend) and, together, they should mean a far higher yield than 1.9% in future. Indeed, Lloyds is aiming to pay out up to 70% of profit as a dividend by 2016 and, as early as next year, Lloyds could be yielding as much as 4.3% at current prices. That is well above the FTSE 100‘s dividend yield of 3.3% and shows that Lloyds should return to income-seeking territory from next year onwards.

Sector Peers

Of course, Lloyds isn’t the only bank that could be a great income play. Sector peer HSBC (LSE: HSBA) (NYSE: HSBC.US) currently yields 5.2% and, with profits forecast to increase by 9% in each of the next two years, this looks set to increase at current price levels. Trading on a price to earnings (P/E) ratio of just 11.3, HSBC looks great value at current levels.

In addition, RBS (LSE: RBS) has income potential. Although it is set to yield just 0.5% next year, its payout ratio is due to be just 6%, which means that it could afford a much higher dividend. As with Lloyds, RBS is forecast to deliver strong earnings growth next year of 17% and, when combined with the potential to pay out a more generous portion of profit as a dividend, means that RBS has income potential (albeit over a longer timeframe than HSBC or Lloyds) and should be on an income-seeking investors’ watch list.

Clearly, HSBC, Lloyds and RBS aren't the only stocks with income potential. The Motley Fool has written a free and without obligation guide that focuses on 5 shares that could provide your portfolio with an income boost. With a mixture of dependable dividends (and growth potential), these 5 shares could help to make 2014 an even better year for your portfolio.

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Peter owns shares in Lloyds, HSBC and RBS.