I invest in order to generate a passive income stream for my retirement. And I do that by spreading my money across a number of dividend-paying stocks. With the one I’m looking at today, I’d need 56,000 shares to get me a monthly dividend income of £100.
That sounds like a lot. But I’m talking about Lloyds Banking Group (LSE: LLOY), and the shares only cost 43p each (at the time of writing). So that comes to £24,000. It’s not exactly small change for me, but it’s a manageable target. The Lloyds share price has been down in the dumps for years, and it’s fallen 11% in the past 12 months.
Reliable dividend?
Lloyds shares are now on a forecast dividend yield of 5%. There are bigger yields out there. But I think steady progressive dividends can do better over the long term than one-off or irregular big yields.
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Won’t the dividend come under pressure now we’re heading into a recession? It might do. And Lloyds’ exposure to the mortgage market could be a bit of a drag now that it looks like the property market could be in for a fall.
But a few things make me think the Lloyds dividend could be reasonably robust. Firstly, the 2021 dividend was covered 3.75 times by earnings. That’s very strong cover, and leaves some safety margin. Lloyds has been conservative in resuming its dividend payments since Covid. And considering the ups and downs it’s faced over the past decade and more, I think that’s wise.
Investing now
I hold Lloyds as part of my long-term passive income portfolio. But I don’t have the £24,000 I’d need to get me my £100 per month. One reason is that I invest across a range of income stocks and not just Lloyds. Another is that I never have £24,000 at a time to make an individual investment.
But if I put away £100 per month starting now, to invest in Lloyds shares, how long would it take to get me to the magic amount?
It would take approximately 14 years, if the Lloyds share price stayed the same and the dividend didn’t move. After that, I could enjoy my £100 per month in passive income for as many years as I wanted. I see that as a decent result for a modest monthly outlay.
Things change
This is just an illustration based on current prices, and I can’t predict what will happen with Lloyds. If I had to guess, I’d expect the dividend yield to settle to, probably, around the 4% mark over the long term.
That’s because I think the share price really should rise — I see Lloyds, along with other bank shares, as undervalued, despite the short-term economic risk. Then again, I would have said the same five years ago, and look what’s happened.
As things change, I intend to keep increasing my investment amounts when I can afford it, and hopefully still hit my target. As part of a diversified long-term passive income strategy, I’m happy to hold Lloyds shares. And I intend to buy more between now and retirement time.
