Banks can be highly profitable and Lloyds (LSE: LLOY) is no exception. In the first quarter alone, the black horse bank earned over £18m a day on average in post-tax profits. Owning Lloyds shares would entitle me to any dividends the bank pays on the back of such mammoth profits.
Here is how much I could earn If I bought 10,000 Lloyds shares for my portfolio today.
Costs and benefits
Given the current price of Lloyds shares, such a move would cost me roughly £4,600. Thanks to a falling share price, purchasing 10,000 shares would be markedly cheaper today than would have been the case five years ago.
Owning Lloyds shares would entitle me to any dividends paid while I held them. Dividends are never guaranteed though. Lloyds most recently cancelled its dividend (due to a regulatory requirement) during the pandemic.
I might also make, or lose, money depending on how the Lloyds share price moves between now and any future sale. When investing with income as a primary objective, it is always important to bear in mind the potential impact of share price moves on my capital.
The dividend
Currently, each Lloyds share earns 2.4p in dividends. So owning 10,000 of them would entitle me to £240 in annual dividends. That would be a welcome boost to my passive income streams, although some other FTSE 100 shares offer markedly higher dividend yields.
Not only would I hopefully earn £240 in the coming year, I think there is clear scope for a higher dividend payout. Lloyds earned so much money last year that as well as its dividend it spent £2bn buying back its own shares. It is currently embarked on another buyback programme.
If business remains strong I think the bank could grow its dividend sharply in coming years.
Considering some risks
However, that is not guaranteed. Even if profits stay high, the bank may decide not to use them to boost the shareholder payout. It could apply the money to buying back more shares, or simply keep it inside the business.
My bigger concern though, is not about whether the company decides to maintain the sort of aggressive dividend raise seen last year, when the annual payout grew 20%. After all, if the bank retains the profit inside the business instead of paying it out, as a shareholder I still ought to benefit from the long-term value creation of the bank having a stronger capital base.
What concerns me is that I see a risk that banking profits could fall sharply in coming years due to higher loan defaults. That could lead to Lloyds shares falling in price. It may mean a smaller not larger dividend down the line. After the 2008 financial crisis, Lloyds’ dividend remained suspended for years.
The bank has a large customer base and loan book. That can be the basis for large profits, as seen last year. But it can also mean a weak economy poses a threat to profits.
I therefore will not be adding a single Lloyds share to my portfolio at the moment, let alone 10,000.
