After a gentle climb to start 2023, Lloyds (LSE: LLOY) shares soon headed lower once the recent banking crisis started to unfold. They’re now 9% cheaper than they were a month ago.
So is this an attractive entry point for dividend investors searching for passive income? Here’s my take.
Going back in time
We haven’t seen the phrase “systemic risk” used this much since the 2007/08 financial crisis. So it does feel like revisiting the past somewhat.
Yet that’s where the similarities end, according to Andrew Bailey, the Bank of England Governor. He told MPs this week that “We’re in a very different place to then“.
And he thinks the woes that afflicted Silicon Valley Bank (SVB) and Credit Suisse shouldn’t affect the UK banking system. He said it’s “not showing any signs of problems“.
Meanwhile, Lloyds stock now has a price-to-earnings (P/E) ratio of just six. That’s much lower than the FTSE 100 average, though banks’ earnings multiples have persistently been below the index average.
By most metrics, Lloyds stock always seems to look cheap.
Indeed, some investors see it as the quintessential value trap, given its two-decade history of shedding incredible amounts of value.
Optimism
However, I’m quite bullish on the business moving forward. Mainly because I think the decade-long era of abundant and cheap capital should now be over for good.
This strange period of near-zero interest rates sits in complete contrast to the 400-year average of over 4%. It was an aberration.
But today, the base rate in the UK is back to 4.25%. And higher rates allow banks to widen their net interest margins (the difference between interest received and interest paid). So I’d expect earnings and dividends to rise in the years ahead.
Plus, CEO Charlie Nunn is planning to diversify Lloyds’ income away from mortgages towards areas like insurance and wealth management.
While this comes with its own risks, I like this move for a couple of reasons.
Firstly, it’ll make the business less reliant on interest rates. But more importantly, I think that these potential growth drivers could make the shares look more attractive to investors in general.
A grand a year in passive income
So how much would I need to invest in the shares to aim for £1,000 a year in passive income?
Well, the stock currently yields a market-beating 5.2%, nicely covered three times by trailing earnings. That means I’d need to invest £19,400 to generate a grand a year, as things stand.
Of course, that’s not guaranteed (no dividend is). And while Lloyds appears to be insulated from the problems engulfing some other financial institutions, no lender is ever truly immune from a sudden bank run.
As Warren Buffett once observed: “If the CEO of the bank came out and said, ‘Our Basel II ratio is 11.4 percent,’ the line would just lengthen.“
These events are driven by emotion rather than solvency.
Overall though, I don’t see any major red flags here. The UK’s largest retail bank has a diversified deposit base and is strongly capitalised. And the dividend appears solid to me.
So, if I had spare cash today, I’d certainly consider Lloyds shares for passive income.
