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Lloyds share price: dividend prospects make me want to top up in 2021

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Lloyds (LSE: LLOY) has suffered more than most FTSE 100 stocks in the past few years. The bank’s share price did pick up in November, more strongly than the index itself. That reduced my losses, but the shares have slowly drifted back down a bit. So far this year, Lloyds is down 1.5%.

That’s not much of a fall. But since the last day of 2020, The Footsie itself is up 4.5%. So why isn’t Lloyds sharing the same modest optimism?

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Part of it may be down to the remaining post-Brexit uncertainties having a negative effect on the banking sector. NatWest Group shares have fallen slightly further. Barclays shares are up a little, but still below the index.

Though we did get a Brexit deal, it largely covers trade in goods. Services businesses didn’t get much of a look in. How they’ll be able to access the EU market remains to be hammered out. Still, since Lloyds has refocused on the UK market, I see little real effect from EU uncertainties. And I also see several reasons to be optimistic over the Lloyds share price in 2021.

Lloyds share price recovery

The November 2020 mini-recovery was welcome in the short term, and I think it tells us something about the long-term too. What I see there is pent-up demand. I reckon a lot of institutional investors want to get back into banking, and into Lloyds specifically. But I suspect they’re biding their time and waiting for the right moment.

There’s another reason behind my optimism over the Lloyds share price in 2020. And that’s the dividend. Yes, I know there isn’t one after the PRA directed banks to withhold their payments during the Covid crisis. It was in fear of another banking meltdown. But that, thankfully, didn’t materialise. And the prohibition has now been lifted.

So will the Lloyds dividend make a comeback in 2021? And, if so, how big is it likely to be? I agree with several of my fellow Motley Fool writers that a reinstatement is likely. But at what level is harder to guess. The 2019 final dividend fell victim to the PRA’s halt. But the total dividend for the year to December 2018 would yield a massive 9% on the current Lloyds share price.

A boost from dividends?

I don’t expect to see that much cash this year, probably not even close. In fact, I suspect Lloyds will approach its return to paying dividends with caution, just as it did when emerging from the financial crisis. When will we know? Pure speculation again, but I can see Lloyds being circumspect in the early months of the year.

If there is an interim dividend, I’ll be surprised it’s anything more than a token. And even a final dividend is, I think, likely to be relatively small. But I can see a dividend, even a modest one, restoring some confidence in the bank’s long-term outlook and providing a boost for the Lloyds share price.

Lloyds is the holding I’m most likely to top up in 2021.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays and 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.

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