As a shareholder in Lloyds (LSE: LLOY), the prospect of the bank’s dividend yield reaching 5% appeals to me. It is already at 4.8%. The bank aims to increase the payout annually, so I think the yield could well reach 5% in the coming year.
But is that enough reason for me to own the shares? After all, over the past year the share price has fallen 12%. So while the prospect of a 5% dividend yield sounds attractive to me, in reality it does not even match the capital loss sustained by a Lloyds shareholder over the past 12 months.
So, should I hold my Lloyds shares or ignore the dividend and sell them?
Growth or income
There are two reasons most investors own shares – growth or income. Growth in a company’s valuation can lead to its share price rising. Sometimes that is because it is increasing its sales fast. Share price growth can also happen when a company’s valuation is low but its business performs well, pushing the price up.
An alternative motivation is the income potential of a company’s dividends.
In reality, investors often buy shares hoping for share price growth and income. In fact I would say that describes my approach to owning Lloyds shares in my portfolio. I am hoping the share price grows, but I also like the Lloyds dividend. Yet as the share price has been moving in the wrong direction, is the dividend alone enough justification for me to keep holding the shares?
Lloyds dividend outlook
Something I like about the Lloyds dividend is that the bank aims to increase it annually. That is because it has what is known as a progressive dividend policy.
In practice, though, dividends are never guaranteed. To keep increasing its dividend, Lloyds needs to make enough money to cover the cost. For now, at least, I think it can comfortably do that. Last year its post-tax profit was £5.9bn. That gave it plenty of spare cash even after paying dividends. The group launched a £2bn share buyback, which shows how flush it is.
But bank profits can move around dramatically. As the biggest mortgage lender in the country, I think Lloyds runs the risk of a recession pushing up loan defaults. That could hurt profits. If profits fall far enough, or the firm simply decides to adopt a cautious approach, the dividend may stay flat – or even be cut.
My approach
So, although the Lloyds dividend yield of nearly 5% is attractive to me, in reality I see some risks to the payout in coming years.
Those same risks could weigh on the bank’s share price. Indeed, that is something that already seems to be happening. At this point, I will not buy more Lloyds shares just for their dividend. I will continue to hold those I have for now, but I am keeping an eye on the growth outlook. If that gets gloomier, I may decide that there is no compelling reason for me to keep owning Lloyds shares from either a growth or an income perspective.
