With almost 165 million shares traded every day, Lloyds (LSE:LLOY) is the most popular stock on the London Stock Exchange. It’s one of the largest banks in the UK. And with a total loan book of £450bn, it’s also one of the most important financial institutions.
Looking at the stock chart, it hasn’t exactly been a stellar performer. But where the bank seemingly shines is dividends. After all, its current yield sits at 5.84%. So investors looking to generate a £1,000 passive income from this enterprise would need to own just under 40,000 shares at today’s price.
This roughly translates into a £17,000 investment. That’s certainly not pocket change. However, an investor could build up this position over time through consistent small monthly purchases and dividend reinvestment. The question is, should they?
Let’s take a closer look at whether Lloyds shares belong inside an investment portfolio.
The shares in 2023 so far
Following the release of its latest results, the bank produced some very encouraging numbers. Rising interest rates are taking their toll on most businesses and households. But for lending institutions, it’s a sigh of relief after having to navigate a debt market of nearly 0% interest rates for over a decade.
Lloyds’ profit margins are on the rise, enabling impressive earnings that, in turn, have boosted the return on tangible equity to almost 17%. That’s ahead of management’s internal target of 14%. With more value being created for shareholders and rising piles of excess capital, dividends have subsequently been hiked, bolstering the passive income prospects even further.
Needless to say, these are all excellent signs for a healthy company ideally positioned to sustain and expand dividends in the long run. But hidden under the surface, there may be trouble brewing.
As previously mentioned, people are struggling. And the number of British bankruptcies is on the rise. According to The Insolvency Service, 643 companies went bust in June, up from 617 in May and 531 in April.
The rising cost of debt can’t be met by everyone. And many of Lloyds’ customers are getting caught in the crossfire. So much so that management has just written off £462m worth of loans!
To buy, or not to buy
Compared to the group’s total £450bn loan book, £462m isn’t exactly much cause for concern. However, if the Bank of England continues to whack up rates to combat stubborn inflation, the number of bad loans could jump drastically. And if that happens, then dividends would likely become compromised.
Obviously, this is the worst-case scenario. However, Lloyds can’t do much to prevent changes in monetary policy if it intends to continue maintaining and growing its dividend. That’s why, despite its popularity, the bank is not a stock I’m keen on owning. So even with more favourable interest rates, I won’t be adding Lloyds shares to my portfolio today.
