6.6% dividend yield! Should I buy high-yield Lloyds shares to boost my passive income?

I’m searching for the best high-yield UK shares to buy. Could this FTSE 100 bank be what I’ve been looking for to boost my long-term passive income?

| 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.

Young black man looking at phone while on the London Overground

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.

Since the start of the year, Lloyds Banking Group’s (LSE:LLOY) share price has dropped 8% in value. It’s a descent that gives it one of the highest yields on the FTSE 100.

At 42.2p per share, the blue-chip bank’s forward dividend yield sits at 6.6%. This is far ahead of the 3.8% average for FTSE index shares.

Having said that, Lloyds shares don’t offer the biggest yield among London’s major listed banks. It beats both Barclays and Standard Chartered on this front, as the table below shows. But the Black Horse Bank doesn’t beat the yields of NatWest Group or Asia-focused HSBC.

FTSE 100 stockForward dividend yield
Barclays5.9%
NatWest Group7.9%
HSBC Holdings8.4%
Standard Chartered2.6%

So should I buy Lloyds for passive income today?

In good shape

On the one hand, it’s easy to see why Lloyds remains highly popular with dividend investors today.

Okay, the British economy could be in for a period of prolonged weakness. But a robust balance sheet means the bank might be best placed to weather any storm and pay more gigantic dividends to its shareholders.

The company’s CET1 capital ratio (a measure of solvency) stood at an industry-leading 14.2% as of June. This was also way ahead of the firm’s targeted 12.5%. Lloyds decided to raise the interim dividend by 15% to 0.92p per share as a result.

Solid forecasts… for now

I think there’s a great chance Lloyds will pay the 2.79p full-year dividend that City analysts are expecting in 2023. That’s even though its recent half-year report flagged up some reasons for concern.

Not only does the company have that strong balance sheet to help it pay that projected dividend. This year’s predicted payout is also covered 2.7 times over by anticipated earnings. A reminder that any reading above two times provides a wide margin of safety.

However, I’m not convinced that the bank will be able to pay the large dividends that City analysts are expecting beyond this year. As trading conditions become tougher, Lloyds’ share price is also in danger of extending its heavy fall.

Why I’m avoiding Lloyds shares

Banks are among the most economically sensitive companies out there. During downturns, demand for their financial products can slump and loan impairments can soar.

These were both evident in Lloyds’ latest financials, which showed the company endured a larger-than-forecast £662m worth of credit impairments between January and June.

The problem is that Britain’s economy is in danger of a prolonged downturn. New Bank of England deputy governor Sarah Breeden has predicted “relatively flat GDP in the UK over the next couple of years”. Major structural problems could sap economic growth beyond the middle of the decade, too.

Lloyds is also in danger because of its reliance on a strong housing market.

Demand for home loans is flagging as interest rates curb buyer activity. Mortgage arrears are also soaring — the value of residential mortgages in arrears leapt to their highest since 2016 last month, Bank of England data shows.

Finally, established banks are also battling to stop digital and challenger banks from attracting their customers. This poses a severe long-term problem that Lloyds and its peers have yet to mount a convincing defence against.

For these reasons, I’m happy to avoid the FTSE bank and buy other high-yield shares for my portfolio.

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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, Lloyds Banking Group Plc, and Standard Chartered 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

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »