Santander (LSE: BNC) (NYSE: SAN.US) will pay a dividend yield of around 7.4% this year, making the bank one of the market’s dividend champions.
Lloyds (LSE: LLOY) (NYSE: LYG.US) on the other hand does not offer a dividend payout at present, although this is set to change in the near future.
A simple choice
When choosing between Lloyds and Santander the choice is simple — do you want income now, or are you prepared to wait for more income later?
What I mean by this is, while Santander currently offers an impressive dividend yield of 7.4%, the payout is set to shrink over the next few years. Lloyds’ payout, on the other hand, is only set to grow over the next few years.
For example, after paying out more than it could afford for several years, Santander is now reducing its dividend payout to a more sustainable level. The bank’s yield is set to drop to only 6.6% next year.
But while Santander is reducing its dividend to preserve capital, Lloyds is looking to restart dividend payouts.
Seeking permission
Lloyds has stated that it will ask regulators for permission to restart dividend payouts during the second half of this year. For investors this is great news.
Indeed, Lloyds used to be one of the FTSE 100’s biggest dividend payers, giving out out just over half of its profits during 2005 and 2006, which equated to a dividend yield of between 6.5% and 7% during each year respectively.
City analysts expect that these hefty dividend yields could return, and they are currently predicting that Lloyds will support a dividend yield of 1.8% this year, followed by a yield of 4.4% during 2015, although there is scope for these forecasts to be revised higher.
In particular, there are some forecasts that state Lloyds’ payout ratio could return to 70% of earnings per share. With earnings of 8p per share forecast for 2015, Lloyds’ could offer a dividend payout of 5.6p per share, which is a yield of around 7.1%.
Secure payout
What’s more, Lloyds’ capital cushion is more robust than that of Santander. Lloyds’ current tier one fully loaded basel III ratio stands at 11.1%, while Santander is targeting a ratio of only 9% by the end of this year. Furthermore, Lloyds’ capital cushion has been expanding rapidly, jumping to the current level of 11.1% from a level of 9.5% as reported during the third quarter of 2013.
Having said all of the above, to some extent, Santander’s dividend payout is de-risked.
Indeed, the bank pays out around 80% of its lofty dividend in shares, as a scrip dividend. This does reduce the impact on the bank’s balance sheet, although a higher number of shares in issue does dilute shareholder equity and depress earnings per share, which could leave some investors feeling short changed.
