Why Lloyds Banking Group PLC Is A Tremendous Dividend Stock

Today I am looking at why I consider Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) to be an exciting income selection.

Dividends expected to charge forth

Undoubtedly, Lloyds Banking Group is a very different institution to the bloated entity hollowed out by the 2008/2009 banking crisis. Indeed, the result of lower impairments, effective cost-cutting and surging activity on the UK high street allowed the firm to move back into the black for the first time in years during January-March, when the firm punched a pre-tax profit of £1.4bn.

As a result the resurgent bank is due to conduct discussions with the regulator in coming months over restarting dividend payments, a scenario which experts believe will yield fruitful results from this year onwards.

Indeed, Shore Capital points towards a maiden dividend of 1.5p per share during the second half of 2014, with the bank anticipated to build the full-year payout to a sturdy 3.5p in 2015. This projected hike drives the yield from 2% for 2014 to 4.6% for next year — by comparison, the entire banking sector carries a forward yield of just 2.9%.

And analysts at Exane BNP Paribas are even more bullish about the firm’s dividend prospects next year, and expect the bank to shell out a Lloydsterrific 5p per share payment. This projection creates a mind-boggling 6.8% dividend yield.

Broker consensus also suggests that prospective payments during the medium term are well protected by solid earnings growth. According to Shore Capital, Lloyds is anticipated to generate earnings of 7.3p and 8.3p per share in 2014 and 2015 correspondingly, figures which create dividend cover of 4.9 and 2.4 times prospective earnings. Any reading above 2 is widely considered very decent security.

Unlike many in the banking sector, Lloyds does not have to worry about the state of its capital reserves, a critical issue for dividend growth. The institution currently boasts a core tier 1 capital ratio around 10.7%, up from 10.3% as of the turn of the year, and is in great shape to keep this sailing comfortably above regulatory requirements.

And investor confidence should be buoyed further by the firm’s successful flotation of TSB Banking Group last month. Surging demand for the newly-listed entity prompted Lloyds to sell 35% of its stake, ahead of its initially-planned 25% holding and which in turn bolstered the bank’s coffers by an additional £455m.

Although Lloyds is still to receive formal approval to resume paying dividends, I believe that this authorisation is a mere formality given the company’s epic turnaround, and that investors can look forward to bumper payouts sooner rather than later.

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> Royston does not own shares in any of the companies mentioned in this article.