At 45p, Lloyds Banking Group (LSE:LLOY) share price has sunk 12% during the past three months. This means that, based on current dividend forecasts, the stock’s forward-looking yields sail above the FTSE 100 average.
For 2023, the high street bank offers an 6.2% dividend yield. This is far above the 3.8% average for UK blue-chip shares.
And things get even better for next year. For then, the company’s yield marches to 6.9%.
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But how realistic are current dividend forecasts? And should I buy Lloyds shares for my ISA this June?
Dividend growth
The FTSE 100’s banks have rapidly rebuilt dividends in the wake of the pandemic. Lloyds for one hiked its own full-year dividend to 2.4p per share in 2022. This was up 20% year on year.
City forecasts expect payouts to keep marching higher too. Full-year rewards of 2.8p and 3.1p are predicted for 2023 and 2024 respectively.
Good protection
Of course these are just broker projections, and the actual dividends The Black Horse Bank pays over this period are not guaranteed. But I think there’s a strong chance this FTSE 100 share will pay the dividends analysts are expecting.
For the next two years, they’re covered around 2.7 times by predicted earnings. A reading north of 2 times provides a wide margin of safety.
On top of this, Lloyds’ strong financial position could help it pay those big dividends if profits disappoint. The bank’s CET1 capital ratio stood at a robust 14.1% as of March.
The £2bn share buyback programme the firm launched in February underlines the strength of its balance sheet.
Time to buy?
So Lloyds looks in great shape to meet current dividend forecasts. However, I’m still not convinced I should buy its shares today.
Those predicted dividends for the next two years are highly attractive. Yet the boost these provide to my overall returns could be offset by further heavy erosion in the company’s share price.
On the one hand, Britain’s banks will be boosted by additional interest rate hikes. Even the most conservative estimates suggest the Bank of England’s benchmark will rise another percentage point from current levels of 4.5%.
Higher rates widen the margin between the interest banks charge to borrowers and offer to savers. But on the flip side, further rate rises threaten to worsen an already alarming increase in loan defaults.
The danger is especially high for Lloyds as the UK’s biggest mortgage provider. Property listings business Zoopla says that 1.4m households will come off fixed-rate deals in 2023. So the level of home loan impairments here could soar as the year progresses.
I’m also concerned about how high street banks will grow loans, given the weak state of the British economy. The outlook is especially bleak for Lloyds, given its lack of exposure to overseas markets.
Lloyds’ share price is down 29% over the past five years. And it’s hard to see how the business will break out of this downturn. On balance, I’d rather buy other UK shares for passive income.
