Since stirring from a 15-year-long stupor in 2024, Lloyds (LSE:LLOY) shares have doubled while also paying rising passive income. Other FTSE 100 lenders have delivered similarly attractive returns.
However, the Black Horse bank has dipped 12% since February, with each share now costing 100p (£1). How much passive income would I get back if I made a £1,000 investment today?
Is the payout affordable?
Lloyds normally dishes out dividends like clockwork in September (following the interim results) and May (following the full-year results). I say like clockwork, but sometimes the dividend machine stops paying, as happened during Covid.
But we’re not currently in a crisis. And according to forecasts, the dividend for FY2026 will be 4.28p, a 17% increase on last year’s payout.
At 100p, this straightforwardly translates into a dividend yield of 4.28%. Therefore, over this time frame, I would expect to generate almost £43 in passive income from a grand.
Better still, forecasts point to Lloyds hiking the payout another 18% in 2027, putting the forward-looking yield at an attractive 5.1%. Encouragingly, both prospective dividends look well covered, at roughly 2.3 times expected earnings.
Cautiously optimistic
In many ways then, the bank is in great shape, boosted by the higher interest rate environment and fattened net interest margins. We’re very unlikely to see interest rates near 0% again.
Meanwhile, loan impairments have remained low and stable, signalling that British households and businesses are handling things reasonably well despite relentless inflation and creeping unemployment rates. This is good to see.
That said, the bank is cautiously optimistic for 2026, noting that “growth in the markets we operate in is expected to slow slightly in comparison to 2025“.
Turning to the stock, the forward price-to-earnings (P/E) ratio of 9.1 doesn’t look too demanding. It’s broadly in line with other FTSE 100 banks.
Finally, Lloyds continues to repurchase shares, with another £1.75bn buyback programme announced in January.
So, will I invest?
Naturally, the boost to earnings from higher rates can’t continue indefinitely. At some point, domestically focused Lloyds is going to need the UK economy to kick into a higher gear.
In other words, people need to become more financially confident, buy homes, save money, take out loans, and start their own business ventures. And existing firms need to expand and hire more people, boosting economic growth.
But what are the chances of that?
Well, Lloyds forecast GDP growth of 1.2% in 2026, but that was back in February. Baseline operating costs for businesses remain high, while energy and food bills are on the rise for consumers. It all adds up to a gloomy picture.
Of course, Lloyds has no control over the long-standing structural issues holding back the UK economy. And it’s worth pointing out that the lender has been lowering costs, including using AI to drive an expected £100m of efficiency savings this year.
Weighing things up though, I’m going to continue holding HSBC as my sole FTSE 100 bank pick. While it has far higher regulatory risk than Lloyds due to its operations in China, it also has much stronger long-term growth prospects across Asia and the Middle East.
Likewise, it offers a similar 4%-5% forward yield, meaning I’m not missing out.
Should you invest £5,000 in Lloyds Banking Group Plc right now?
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Ben McPoland owns shares in HSBC.
