The Motley Fool

Forget the top Cash ISA rate. I’d pocket a 5.4% dividend from Lloyds Bank shares

The outlook for savers remains quite depressing as we start the new decade. Currently, the top easy-access Cash ISA interest rate is just 1.35%, according to comparison websites, which is lower than the rate of inflation.

That said, if you don’t need access to your money in the short term, and you’re willing to take on a little risk, there are plenty of ways to generate a higher level of return. Here, I’ll explain how you could potentially pick up a yield of around 5.4% by buying shares in one of the UK’s most well-known companies – Lloyds Bank (LSE: LLOY).

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Build wealth with dividends

Before I discuss Lloyds, let me explain the basics of dividends. These are cash payments that companies pay to their shareholders on a regular basis, out of profits. Essentially, dividends are a reward for being a shareholder – you get to enjoy a share of the company’s profits.

Not all companies pay dividends, but here in the UK, plenty do. And some of the dividend yields on offer are extremely attractive relative to Cash ISA interest rates.

A 5.4% yield

Looking at Lloyds, it paid its shareholders 3.21p per share in dividends last year. Given that its share price is currently 62.6p, that means the yield on offer right now is roughly 5.1% (3.21/62.6 = 0.051). That’s nearly four times the top Cash ISA rate!

But it gets better. For the year just passed (FY2019), City analysts expect Lloyds to raise its dividend payout to 3.36p per share. That means that if you buy the shares at 62.6p, you could be in line for a 5.4% payout.

Invest £1,000 in Lloyds shares and you’re potentially looking at income for the year of over £50 (tax-free if you buy the stock within a Stocks & Shares ISA). By contrast, £1,000 in the top easy-access Cash ISA is going to get you just £13.50 interest.

Risks to consider

Of course, there are a number of risks to be aware of. Firstly, it’s important to understand that, while shares tend to rise over the long run, in the short term, they move up and down constantly depending on financial news.

This means that if you buy Lloyds shares, you may not get back what you invested. Given the volatile nature of shares, they’re not suitable as a short-term investment – experts recommend investing in shares for at least five years.

I’ll also point out that every company has its own unique risks. In Lloyds’ case, it’s highly exposed to the UK economy and its property market. If economic conditions were to deteriorate due to Brexit, its share price could fall. When investing in shares, it’s a good idea to spread your money over many different companies to reduce your company-specific risk.

Secondly, unlike bank interest, dividends are not guaranteed. If Lloyds’ profits were to fall, it could reduce its dividend payout to shareholders.

All things considered, however, I believe Lloyds shares have considerable appeal from an income perspective. Compared to Cash ISA rates, its prospective dividend yield of 5.4% looks very attractive.

A top income share with a juicy 6% forecast dividend yield

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He even anticipates that the dividend could grow nicely too — as this much-loved household brand continues to rapidly expand its online business — and reinvent itself for the digital age.

With shares still changing hands at what he believes is an undemanding valuation, now could be the ideal time for patient, income-seeking investors to start building a long-term holding.

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Edward Sheldon owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.