I’d buy 11,000 Lloyds shares for £1,250 in passive income over 5 years!

Dr James Fox explains why he’d buy more Lloyds shares as he looks to propel his portfolio’s passive income-generating capacity in the coming years.

| 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.

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.

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.

Lloyds (LSE:LLOY) shares are among the most traded on the FTSE 100. But I’d still argue that they’re rather unloved and offer considerable upside.

I already own Lloyds shares, but I’m intending to buying more this month in an effort to enhance my passive income generation and propel my portfolio forward. In fact, if I bought 11,000 shares in the banking group, I could hope to recoup £1,250 in dividends over the next five years.

That’s clearly a positive return, but I’d also expect to see some share price growth too. So let’s take a close look at Lloyds.

Attractive dividends

The current 4.2% dividend yield isn’t the biggest on the FTSE 100, but it’s larger than the majority of dividend-paying stocks. And, to be honest, I’m quite happy with that yield from a reliable and largely unexciting stock like Lloyds.

And, despite the tough economic conditions, City analysts are forecasting a full-year dividend of 2.4p in 2022, rising to 2.7p and 3p in 2023 and 2024 respectively. The 2024 figure represents a 25% increase from the current position. 

That means if I were to buy at the current price, my dividend yield would be 6.25% in 2024.

The dividend could well rise in 2025, 2026 and beyond. But let’s imagine the yield averaged at 5% over the next five years, relevant to the current price. If I bought 11,000 shares today for £5,000, over that five year period I could recoup £1,250 — equivalent to 25% of my investment.

Outperforming

But I’m backing Lloyds to outperform the market over the next five years. So I’d hope to see share price gains in addition to my dividends.

Lloyds has been trading at a discount for some time. In fact, some discounted cash flow models suggest the stock could be undervalued by as much as 60%. That’s considerable and would provide me with a huge margin of safety.

There are also near-term tangible tailwinds in the form of higher interest rates, and regulatory change that could provide the banking sector with a much-needed boost.

With the Bank of England pushing the base rate up more than 300 points last year, net interest margins (NIMs) have risen, and continue to rise. The bank recently said the NIM was forecast to reach 2.9% by the end of the year (2022), and it could grow further this year.

Lloyds is even earning more interest on its deposits with the central bank. Lloyds could be pulling in around £2.5bn in extra revenue from its £145.9bn of eligible assets and £78.3bn held as central bank reserves.

There are, of course, challenges and most of these are presented by the forecast recession. Lloyds has already had to put money aside for bad debt provisions. In Q3, impairment charges soared to £668m from a release of £119m a year before as bad debt concerns increased.

But I’m hopeful not all of these funds will be needed and it looks like higher rates will continue to propel earnings forward.

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.

James Fox has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. 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

Investing Articles

Prediction: 12 months from now, £5,000 invested in Tesla stock could be worth…

Tesla stock has endured a miserable year so far, falling by 29%. Muhammad Cheema takes a look at how it…

Read more »

Investing Articles

See what £10,000 invested in Tesla shares at their mid-December peak is worth today 

As the world absorbs the full scale of Donald Trump's tariffs, Tesla shares are reeling. Investors who bought the stock…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »

Investing Articles

2 things to remember when stock markets are turbulent

US trade policy has rattled the stock markets in New York, London and elsewhere. Our writer outlines a couple of…

Read more »