Will Barclays PLC And Lloyds Banking Group PLC Really Yield 5%?

At present, the City is predicting that Barclays (LSE: BARC) (NYSE: BCS.US) and Lloyds (LSE: LLOY) (NYSE: LYG.US) will both support a dividend yield of around 5% within two years. Some forecasts even suggest that Lloyds could support a dividend yield of more than 7% within two years.

Now, to some these forecasts may seem too good to be true. Indeed, Lloyds does not offer a dividend at present and Barclays is currently undertaking a major restructuring.

So, are these forecasts to be believed, or is the City being over optimistic?

Lofty forecastsLloyds

Barclays is hardly popular in the City at the moment as the bank is struggling to fend off a number of lawsuits and fines. Nevertheless, City analysts are currently predicting that the bank’s shares will support a dividend of 10.5p during 2015, which is a yield of approximately 4.7% at current levels.

In addition, the City is predicting that Lloyds’ shares will support a payout of 3.25p per share during 2015, or a yield of 4.3% at current levels. However, other forecasts suggest that the bank could be set to yield 7% by 2015.

Getting past regulators

Lloyds can only meet these forecasts if it pays a dividend. The bank has stated that it will seek the permission of regulators to recommence dividend payouts during the second half of this year. However, there is still a risk that regulators could turn the bank’s request down.

Further, the results of strict ECB and BoE stress tests are expected later this year. If either Barclays or Lloyds fails these tests, regulators could force the banks to reconsider cash payments to investors.

Actually, the results of these stress tests are causing some worry in the City. The tests are designed to be the most vigorous yet, hopefully uncovering any skeletons in the closet.

Making progress

Still, both Barclays and Lloyds are recovering well from their troubles over the past few years. Lloyds’ half-year results, showed that the bank’s tier one capital level had reached the all-important 11% level, while net interest income jumped 13%.

Barclays’ half-year results were less impressive. The most concerning factor about Barclays’ results was revelation that the bank is still seeking, “further leverage reduction opportunities”, after the bank found a £12.8bn black hole in its balance sheet last year.

This implies that the bank is still struggling to bolster its capital cushion. As a result, the bank could be forced to cut dividends in order to save cash.

Will they pay out?

So the question is, will Barclays and Lloyds meet the City’s dividend forecasts? Well, it depends on the outcome of the stress tests later this year. However, with Lloyds’ capital level rising, the bank looks well placed to offer a hefty dividend payout in the future. Barclays on the other hand is still struggling to reduce leverage.

Should you buy in?

Still, it’s up to you whether you decide to buy, sell, or hold Barclays and Lloyds, although I’d strongly suggest you look a little closer at the two banks before making any trading decision.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.