The Lloyds Banking Group (LSE:LLOY) share price has dropped 7% in 2022. This has driven the dividend yield at the bank even further above the FTSE 100 average.
For 2023, the Black Horse bank’s yield sits at 5.9%, well above the 3.7% average for FTSE index shares. And the dial moves to an even-better 6.5% for 2024.
I’m seeking ways to make extra income over the next two years. And at first glance Lloyds shares might be just what I’ve been searching for. But how far can I trust current dividend forecasts?
Dividend growth
Lloyds understands the importance of paying big dividends to its shareholders. So it’s been building shareholder payouts aggressively as it recovered from the depths of the pandemic.
It hiked the total payout to 2p per share in 2021 from 0.57p the previous year. And in July it hiked the interim dividend 20% year on year, to 0.8p.
City analysts are expecting a full-year dividend of 2.4p in 2022.
In spite of the tough economic outlook, brokers are tipping further dividend growth over the short term, too. Dividends of 2.7p and 3p per share are predicted for 2023 and 2024 respectively.
Good protection
It seems as if current dividend estimates look quite realistic, too. Firstly they’re covered 2.7 times by expected earnings. This provides a wide margin of error in case earnings disappoint.
Lloyds could also use its cash-rich balance sheet to help it pay those big anticipated dividends. The bank’s CET1 capital ratio (following dividends and pension contributions) stood at 15% in September. This was well above its target of 12.5% plus a 1% management buffer.
But are Lloyds shares a buy?
Of course there’s no such thing as a guaranteed dividend. The sudden outbreak of Covid-19 — and the colossal impact this had on shareholder payouts across the London Stock Exchange — is evidence of this.
But on paper Lloyds looks in great shape to meet its dividend forecasts for next year. Its focus on the stable retail banking sector will help it to achieve this, too.
Demand for financial products like current accounts and credit cards remains largely robust at all points of the economic cycle. So profits at Lloyds might remain more stable than those of other banking stocks.
Here’s what I’m doing now
However, I’m not convinced that the bank will continue growing strongly beyond next year. Its profits are still closely tied to the performance of the UK economy. And with some economists predicting a prolonged downturn until well into 2024, things could get bumpy.
The rate at which Lloyds is stashing away money for future bad loans is a big red flag to me. It set aside £688m in the three months to September alone, taking the total to well above £1bn.
The dividend outlook remains highly uncertain beyond 2024, too. I think Lloyds might struggle to generate decent earnings as the British economy grapples with an extended Covid-19 hangover and Brexit-related problems.
As a long-term investor, I’d much rather buy other dividend stocks for the New Year.
