Lloyds Banking Group PLC’s Dividends Are Set To Rise Fast

LloydsA company that hasn’t paid any dividends for the past five years hardly sounds like a good one for income investors. But that’s Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US), and those seeking annual cash could be overlooking a lucrative investment if they ignore it.

The thing is, if you want your cash to spend now, then Lloyds is probably not for you.

But if you’re in the business of setting up a portfolio to bring in a steady income in the future, take a look at these forecast figures:

Year Dividend Yield Cover Rise
2013 0p 0% n/a 0%
1.3p 1.8% 5.91x n/a
3.2p 4.4% 2.59x +138%

* Forecast (You can fill in the previous few years’ figures yourself if you like – they’re all zeroes)

Permission needed

A 1.8% forecast yield for this year doesn’t look anything special. But there was no first-half cash paid, and Lloyds must seek the approval from the Prudential Regulation Authority before it can hand over a penny to shareholders.

Lloyds intends to ask for permission in the second half of this year, and judging by the way its capital ratios are going, that looks likely to be granted — at first-quarter time reported in May, Lloyds revealed a fully loaded CET1 ratio of 10.7%, up from 10.3% at the end of December 2013.

The future for dividends

But what about long-term dividend investors?

I don’t think it would be too unfair to see Lloyds shares trading at a P/E of about 12 (a little below the FTSE 100 long-term average of 14) once it’s firmly back into respectability in a couple of years time.

If we assume modest earnings of 10p per share (there’s 8.2p forecast for 2015), that would suggest a share price of around 120p. And if Lloyds should maintain a 4% yield by then (which would be in line with longer-term performances of banks), we’d be looking at a dividend of 4.8p per share.

If you buy now…

So if you buy Lloyds shares at today’s price of 73p apiece, you could be looking at an effective yield on that price of 6.5% or better in a couple of years — and it could be even better if earnings rise more strongly than my conservative estimate.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.