Banks can make lots of money. Lots and lots of money. Take Lloyds (LSE: LLOY) as an example. Last year, the Black Horse bank earned £4.7bn. That sort of profitability helps explain why Lloyds’ shares have increased in value by 126% over the past five years.
For shareholders though, there is more to this story than just capital gain. It is also worth considering dividends.
Five years back, Lloyds had suspended its dividend (in line with other UK banks, at the behest of the Bank of England) amid the pandemic. Today, by contrast, the dividends are flowing and Lloyds’ shares offer a 3.5% yield.
Given the share price rise, that means that someone who invested five years ago and held their shares to this point would now be earning a much bigger yield, well over 7%.
Looking for passive income from dividend shares? Doing the sums…
What about someone interested now in trying to set up passive income streams? What might that yield mean for them? A back-of-the-envelope calculation suggests that at a 3.5% yield, targeting £1,000 in dividends would require an investment of close to £30k.
Popping on my Rachel Riley hat, just divide the target amount (1,000) by the yield (3.5) and then multiply by 100 to get that sort of roughly-estimated number. This works for any income share when it comes to understanding the ballpark amount needed to target a certain passive income.
More precisely, we could look at Lloyds’ dividend per share. Last year, that was 3.65p.
So to get £1,000 worth of dividends at that rate, an investor would need to own 27,398 Lloyds’ shares. At the current price, that would come with a price tag of around £28,713.
Where might the dividend go from here?
Bear in mind that was last year’s dividend. Since a big cut during the pandemic, the annual payout per share has been growing.
With its strong brands, massive mortgage book (it is the UK’s leading mortgagee) and proven business model, I think in a decent economy Lloyds could well keep growing its dividend.
That is not guaranteed though. The pandemic cancellation demonstrates as much. So does the fact that even now Lloyds’ dividend per share is but a fraction of what it was 20 years ago prior to the financial crisis.
Banking can be a profitable business, but it can be a risky one. Lloyds’ valuation right now, after that large share price increase in recent years I mentioned above, does not look attractive to me.
In a decent economy it can do well, but I see a risk that geopolitical uncertainty and the UK’s sluggish economic outlook could mean at some point we are in a struggling economy, not a decent one.
So I have no plans to add Lloyds’ shares to my portfolio. Fortunately, I can see lots of attractive passive income ideas elsewhere in the British stock market right now.
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Christopher Ruane does not hold any positions in the companies mentioned.
