Should I buy Lloyds shares for passive income?

Is Lloyds a great stock to buy to boost my dividend income? Here are the pros and cons of investing in the FTSE 100 bank.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Middle age senior woman sitting at the table at home working using computer laptop clueless and confused expression with arms and hands raised.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Lloyds Banking Group (LSE: LLOY) share price is taking a battering. A stream of poor economic data and downwardly-revised UK growth forecasts are smacking appetite for the banking share.

The outlook for Lloyds in 2022 — and 2023, if OECD forecasts of no growth are to be believed — is quite grim. But, as a long-term investor, should I be looking to exploit recent weakness by buying the bank on the cheap?

Lloyds’ sinking share price has driven its dividend yield through the roof. And as someone who invests for passive income I’ve sat up and taken notice. The bank’s yield now sits at 5.5%, way above the FTSE 100 average of 3.9%.

Rising rates to boost Lloyds

What’s more, recent share price weakness means the Footsie bank now trades on a price-to-earnings (P/E) ratio of 6.8 times. Lloyds fans would argue that this makes it too cheap to miss. And particularly so as interest rates rapidly rise, boosting the margins it makes on its lending activities.

Claudia Nelson, senior director of banks at Fitch Ratings, notes: “Major UK banks [will] benefit most from rising interest rates given their large market share in current account deposits.” And Lloyds is one of these big players that stand to gain enormously.

The Bank of England (BoE) has upped interest rates for five consecutive months in response to curb soaring inflation. Calls for more aggressive action are growing as well. This week, key policymaker Catherine Mann called for “a more robust policy move” as the falling pound worsens the scale of price rises.

Mann isn’t the only one calling for more aggressive interest rate hikes either. It’s why analysts at ING Bank think rates — which currently sit at 13-year highs of 1.25% — will rise an extra half a percentage point in August.

Mortgage arrears soar

Having said that, the risks to Lloyds’ profits and its share price are colossal despite the benefit of rising interest rates.

The UK economy is sinking as inflationary pressures spectacularly grow. Worryingly, the BoE again cut its growth forecasts and now thinks GDP will shrink 0.3% in Q2.

As a potential investor I worry about sagging bank revenues and an explosion of bad loans as Britain toils. I’m particularly concerned for Lloyds, given its position as the country’s largest mortgage lender. Home loan arrears have recently spiked to their highest in 12 years.

A dangerous pick for passive income?

Lloyds’ cheap share price reflects these growing near-term threats. It also reflects its uncertain future once the cost of living crisis eventually passes. The rising popularity of challenger banks is another threat to established operators like this. So is the long-term economic impact of Brexit on the UK economy and, consequently, on bank income.

That 5%+ dividend yield that it offers certainly looks appetising right now. But I’m not tempted to buy into the business today. The key to enjoying a steady passive income is to own shares that can pay decent dividends over the long haul. I’m not sure Lloyds will have the financial firepower to do this as the decade progresses.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer 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 diverse range of insights makes us better investors.

More on Investing Articles

US Stock

Here are the best-performing S&P 500 stocks after the US election result

Jon Smith notes some of the largest gainers from the S&P 500 yesterday and explains how the election result has…

Read more »

Growth Shares

2 UK stocks knocking on the door of promotion to the FTSE 100

Jon Smith points out a couple of UK stocks that he feels could be ready for the big league based…

Read more »

Investing Articles

Rolls-Royce shares just fell 7%. Is it time to buy?

This investor in Rolls-Royce shares takes a look at the FTSE 100 engine maker's trading update to see what caused…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

What’s going on with the Auto Trader share price?

Paul Summers takes a closer look at why the Auto Trader share price has tumbled despite the company posting higher…

Read more »

Investing Articles

Legal & General shares look set to give me a mind-blowing 10.22% yield in 2026!

Harvey Jones is getting a brilliant second income from his Legal & General shares and expects even more to come.…

Read more »

Investing Articles

I’d consider this beaten-down FTSE 100 dividend stock to target a second income of £19,000

Our writer sees an opportunity to earn a substantial second income by investing in this UK insurance giant. Here’s his…

Read more »

Investing Articles

How cheap is the 72p Vodafone share price?

The Vodafone share price looks very cheap having fallen to a 72p price tag. But is it really the bargain…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Up 43% in a year and the IAG share price could keep on rising!

One of the FTSE 100’s highest-flying stocks still looks cheap on an earnings basis. Is this a brilliant buy for…

Read more »