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Why Lloyds Banking Group plc Could Be The Perfect Dividend Play

So Lloyds (LSE: LLOY) (NYSE: LYG.US) has finally confirmed that it will be paying their first dividend since the Recession.

The first payment of 0.75p per share doesn’t sound like much. But this is just a tentative toe in the water for the bank; you can expect the yield to increase steadily as the company grows its profits over the next few years.

Lloyds is finally profitable again

The journey since the Financial Crisis has been long. A business that was once highly profitable was suddenly loss-making. Year by year, these losses have been reduced until, round about now, the bank is profitable once again.

The recovery has been gradual: bad debts and costs have been reduced, capital strength has been improved and margins are increasing. And as the company has recovered, so has its share price.

A firm will only pay a dividend once it feels it is consistently profitable. It is a sign of optimism about the company’s prospects, and it also gives investors extra confidence that they can buy into the business.

Just how high could the dividend rise? Well, it is predicted that the dividend yield could be 3.76% in 2015, rising to 5.03% the following year. The P/E ratio also shows how reasonably priced this company is: the 2015 number is 9.78, falling to 9.10.

The dividend increases must mean that profitability is rising at some pace. Check the earnings per share progression, and you can see how dramatic the transformation is:

2012: -2.10p

2013: -1.20p

2014: 1.60p

2015: 8.08p

2016: 8.68p

Should we reset our view of the banks?

Are consensus forecasts over-optimistic? They may be, particularly when we consider that banks will still be paying billions of pounds of PPI, and other, fines. This is an industry that has had false dawn after false dawn.

But I genuinely believe that profits, dividends and share prices are set to trend upwards. Thus I think this is the ideal time to add Lloyds to your high-yield portfolio.

The ever-strengthening housing market, a recovering economy and increasing consumer spending add to the optimism about Lloyds’ prospects.

Since the Crisis, investors have just not thought of the banks as dividend plays. They were seen as too risky and inconsistent. But over the next few years small investors, fund managers and pension funds will begin to add financials such as Lloyds to their income portfolios.

When a company is profitable, it invests some of its profits in the business, and some it returns to shareholders as dividends. These shareholders then reinvest this money to buy more shares, and so their investment grows.

This is the basic concept behind high-yield investing, and it can make all the difference to your financial future. We at the Fool have written a step-by-step guide to this key investment technique.

Want to learn more? Just click on this link to read "How to create dividends for life", and it will be dispatched instantly to your inbox.

Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK 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.