My favourite way of generating passive income is to buy shares. The idea of doing very little — and earning dividends — appeals to my natural laziness.
But shareholder returns are never guaranteed. And there’s little point in earning a decent second income if the value of the underlying investment is in terminal decline.
That’s why I’m always careful when choosing what to buy.
I’m also interested in what other investors are doing. I regularly look at the ‘Top of the Stocks’ section of the Hargreaves Lansdown website to see what’s popular.
One stock that regularly appears is Lloyds Banking Group (LSE:LLOY). It claims to have the largest shareholder base in the UK, with 2.3m people having a stake in the business.
But does it meet my definition of a good passive income stock?
Turbulent times
With its heavy exposure to the domestic economy, and the property market in particular, its shares have failed to return to their pre-pandemic levels.
Since November 2018, they’ve fallen 25%. And compared to December 2019, the stock has lost a third of its value.
This has helped lift the yield to 6.5%, comfortably above the FTSE 100 average of 3.9%.
But this doesn’t necessarily make it a good investment. It could be a warning sign that there’s something fundamentally wrong with the business.
In theory, the apparently high return on offer should attract investors. This should push the share price higher causing the yield to fall closer to the average.
If investors don’t want to buy the stock — despite the prospect of decent shareholder returns — it could be an indication that they feel it doesn’t offer good value, or that the dividend is unlikely to be sustained at its present level.
A look back
We’ve seen that the Lloyds payout is currently above the average of its Footsie peers, but how reliable is it?
To answer this, I’ve gone back in time to see what’s been paid in recent years.
| Financial year | Interim dividend (pence) | Final dividend (pence) | Special dividend (pence) | Total dividend (pence) |
| 2015 | 0.75 | 1.50 | 0.50 | 2.75 |
| 2016 | 0.85 | 1.70 | 0.50 | 3.05 |
| 2017 | 1.00 | 2.05 | – | 3.05 |
| 2018 | 1.07 | 2.14 | – | 3.21 |
| 2019 | 1.12 | – | – | 1.12 |
| 2020 | – | 0.57 | – | 0.57 |
| 2021 | 0.67 | 1.33 | – | 2.00 |
| 2022 | 0.80 | 1.60 | – | 2.40 |
| 2023 | 0.92 | TBC | – | TBC |
I think it’s fair to say that it’s been very erratic.
And as a further warning that dividends can’t be taken for granted, due to the fallout from the global economic crisis, the bank didn’t pay any dividends between November 2008 and April 2015.
What do I think?
However, although volatile between 2015 and 2020, since 2021 there have been signs that the payout is becoming more reliable. A new trend, where the amount paid is steadily increasing, also appears to be evolving.
If Lloyds increases its final dividend for 2023 by 15% — the same amount by which it raised its interim payment — shareholders will receive 2.76p a share this year.
And the consensus forecast of 20 analysts covering the stock is for 3.03p in 2024, 3.35p in 2025, and 3.71p by 2026.
In an era of higher interest rates, Lloyds’ income should remain strong. And if the UK economy recovers in line with predictions, the volume of bad loans will recede. This will make it more likely that the dividend expectations of the ‘experts’ are met.
Personally, I think Lloyds is a good passive income stock. That’s why I own shares in the bank. And I remain confident that others will soon come round to my way of thinking. Therefore, I don’t expect the attractive yield currently on offer to be available for too much longer.
