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Lloyds Banking Group (LSE:LLOY) shares provide the highest dividend yield within the FTSE 100Based on current dividend estimates.
At 43.1p per share, the yield on Black Horse Bank for 2023 stands at a substantial 6.5%. This exceeds the 4% forward average for Footsie stocks.
The yield further escalates over the next two years. Projections for 2024 and 2025 rise to 7.4% and 8.4%, respectively.
The Lloyds share price has remained relatively stable over the past year. However, the bank has dropped by almost a fifth since the start of February due to increasing concerns about the state of Britain’s economy.
Would the significant return from the bank’s price decline make it an attractive buy? Or should this stock be avoided due to the potential for further price decline?
To begin with, it’s important to assess the plausibility of the current dividend forecasts. Shareholder payouts have surged since the depth of the Covid-19 pandemic, and financial experts anticipate a further increase from 2.4p per share last year to 2.8p per share in 2023.
Dividends of 3.2p per share for 2024 and 3.6p for 2025 are also anticipated.
A brief review of earnings forecasts indicates that Lloyds is well positioned to meet these dividend predictions. Estimated payments are backed by expected profits between 2.3 times and 2.7 times over the next three years. Any reading above 2 provides a substantial margin for error.
Furthermore, the bank’s robust balance sheet adds further strength to the dividend forecast (at least in the short term). As of September, Lloyds’ CET1 capital ratio stood at a strong 14.6%, still significantly above the 12.5% target and 1% management buffer.
In fact, some analysts believe the bank’s strong capital position could lead to additional share buybacks. The company completed a £2 billion buyback during the summer.
However, Lloyds faces bullish turmoil that could jeopardize dividend estimates in the coming year and beyond, and perpetuate its recent downtrend in share price.
One factor contributing to this is that the pressure on net interest margin (or NIM) is set to intensify. This metric measures the difference between the interest paid by firms to savers and the fees charged to borrowers.
Falling inflation is sparking speculation that interest rates have peaked. In fact, there are predictions that the Bank of England may commence rate cuts in the spring.
Simultaneously, pressure from the Financial Conduct Authority to increase savings rates – combined with growing competition in the industry – casts a shadow over the NIM.
I’m shunning Lloyds shares
Declining NIM is not the only concern for retail banks. If the British economy continues to be weak in the short-to-medium term, there may be low demand for their loans (as predicted by most economists). The declining housing market is also particularly challenging for Lloyds, given its position as the largest home loan provider in the country.
Finally, the ongoing rise in loan losses also poses a significant risk to profits and dividends. The company recorded £187 million worth of bad debts during the third quarter alone.
Lloyd’s holds dominant positions in numerous product areas. And while this can help stabilize earnings during these challenging times, my preference would still lean towards purchasing other UK shares for dividend income at present.
Posted 8.4% Return on Investment! Here are the projected dividends for Lloyds shares until 2025 appeared first on The Motley Fool UK.
Royston Wild has no position in any stocks mentioned. The Motley Fool UK recommends Lloyds Banking Group PLC. The views expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a wide variety of insights can make us better investors.
Motley Fool UK 2023