Passive income generation has been a key aim for me this year. I can’t afford to have spare cash sitting around being eroded by high inflation. Investing in a dividend stock that can pay me income helps me to make my money work harder. Lloyds Banking Group (LSE:LLOY) wasn’t a stock I looked to for income during the pandemic. Yet with Lloyds shares offering a 5% yield currently, my view is starting to change.
History with dividend payments
Lloyds has had an unsteady relationship with dividend payments over the past decade. From 2016 to early 2020, the stock had a yield that ranged from 1% to briefly spiking above 10%. In 2020, pressure from the banking regulators meant that most financial stocks stopped paying dividends in order to protect the balance sheets.
The impact of the pandemic increased the potential for loan defaults and write-downs on other liabilities. However, this pressure eased over the course of the following year, allowing Lloyds to resume payments in 2021. It’s now back to paying an interim and final dividend, with the stated aim in half-year results being to continue to grow the dividend per share.
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This has helped to increase the dividend yield. The other element that has been boosting this is that the share price is down 13.2% over the past year. When I calculate the dividend yield, if the share price is falling, the yield will rise automatically.
Putting this all together, I think that a 5% yield could grow over the next year. If the dividend per share continues to rise and the share price is stagnant, it could sit in the 6%-8% range in 2023.
Lloyds shares are falling, but I’m not concerned
The risk to my view is the fact that the share price has fallen by double-digits over the past year. Some would flag this up and say that investors aren’t confident in holding the stock. If the bank struggles to maintain investor confidence, it could be because the company isn’t sound.
Yet even though 2022 half-year profit after tax was £2.8bn versus £3.9bn in 2021, this was largely down to the “non-repeat of the significant impairment release and the deferred tax credit in the first half of 2021”. Therefore, it wasn’t a reflection on the core running of the business in 2022.
Net income was up 12%, to £8.5bn. Higher interest rates from the Bank of England helped to boost this, with the outlook being for a further increase in the net interest margin. Deposits also grew by £1.9bn, further allowing the bank to benefit from income made from deposits.
With that in mind, I think the bank is in a strong enough position to continue to pay out dividends going forward. I think the fall in the share price is more reflective of the general poor market sentiment around the UK economy, rather than something specific relating to Lloyds.
I’ve put the bank on my watchlist to purchase when I have some free cash.
