At the start of 2021, the dividend yield for Lloyds Banking Group (LSE:LLOY) was 0%. Since then, things have picked up. Lloyds shares now offer a yield comfortably above the FTSE 100 average. Looking ahead to 2024, does it make sense to buy the stock now for a second income?
Let’s get the numbers
In 2023, Lloyds paid out two dividends totalling 2.52p. This gives a current yield of 5.93%.
The forecast for next year is for it to rise considerably to total 3.2p. The share price has traded this year in a range of 40-54p. So if I take an assumptive price of 47p for next year, it would give me a dividend yield of 6.8%.
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I have to take a rough price, but clearly the share price could be higher or lower next year, which will impact the yield.
Looking at the rest of the index
It’s tough to call a stock a “no-brainer purchase” without comparing it to various alternatives. To begin with, how does the potential yield for next year compare to the FTSE 100 as a whole? The average dividend yield is 3.9% at the moment.
This will fluctuate next year, but it’s highly unlikely it will climb up to 6.8%. So if I compare Lloyds stock to a FTSE 100 index income tracker, I can see a clear favourite.
Comparing the banking sector
The next stage is filtering down to the major competitors for Lloyds. After all, if I’ve got a diversified income portfolio already, I might only want to include one extra stock from the banking sector.
To determine if this should be Lloyds or not, I can look at the yields for the major banks.
Straight away I can spot a problem. Even without considering the dividend forecasts for next year, both HSBC (6.9%) and NatWest (7.52%) have yields higher than Lloyds. Incidentally, most of the major banks I reviewed have positive dividend forecasts for next year.
Granted, not all banks might fit the bill for the type of firm I want. For example, Lloyds and NatWest are predominantly UK banks. HSBC is global in nature. This could influence my decision away from just the cold hard numbers.
Measuring up to the top performers
In order to get in the top 10% of the FTSE 100 when ranked on yield, Lloyds would need to beat 7.5%. I don’t see it reaching that level any time soon.
If I try and answer the title question, I can see that the bank isn’t close to being a top performer, or being the best in the sector. Yet I would say it’s a no-brainer to consider buying it in comparison to a passive income tracker fund.
The other point to remember is that this test has been purely centred around the income figures. In reality, this is a narrow way to consider buying a stock. I need to factor in many other points (eg financials, sector outlook, etc) before coming to a more educated conclusion.
