Should I buy Lloyds shares for the 6.1% dividend yield in 2025?

This writer is wondering if he should add Lloyds shares to his income portfolio, despite the car finance mis-selling crisis deepening.

| More on:

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.

Lloyds (LSE: LLOY) shares have performed very strongly recently. In fact, they’ve now doubled in four years, and are up 32% in the past year alone. That’s without adding in the dividends.

Looking ahead, there are some attractive dividend yields forecast for the next couple of years. So, should I add this FTSE 100 bank stock to my portfolio? Let’s discuss.

Passive income potential

As things stand, City analysts expect Lloyds to pay out total dividends of 3.40p in 2025 and 3.87p in 2026. Based on the current share price of 56p, the respective forward yields are 6.1% and 6.9%.

That looks attractive to me, especially as the dividend cover is strong. For 2025, the prospective payout is covered twice over by forecast earnings. While no dividend is guaranteed, this level of coverage means the income prospects appear solid.

A 6%+ yield is comfortably above the FTSE 100 average of 3.5%. It’s also higher than the forward yields of Barclays (3.7%) and NatWest (5%). Both of those stocks have doubled over the past year or so!

However, the Lloyds forward yield lags that of HSBC, which is offering 6.7%. The Asia-focused bank is also a much better candidate than Lloyds to dish out special dividends, as it continues to sell off various Western businesses.

All in all though, there’s some decent passive income potential here from Lloyds.

Two issues

However, there are two key concerns here. First, as interest rates drop, the lender’s net interest income (NII) is likely to shrink. This income, generated from the difference between the interest earned on loans and paid on deposits, has already been declining for Lloyds in recent months.

Second, the motor loan mis-selling issue is becoming something much bigger than originally feared. Last week, the Court of Appeal declared it unlawful for lenders to pay commissions to car dealers without the borrower’s consent. The hidden commission means consumers have been paying more for car finance.

Lloyds is the biggest motor finance provider among the UK’s high street banks, with its Black Horse division overseeing around £15bn in loans. So it’s at the centre of all this.

This could have wider consequences

How much could this cost Lloyds? I’ve seen figures as high as £3.9bn, in a worst-case scenario. Others put it a bit lower. Lloyds has set aside £450m, just in case.

However, from what I understand, this ruling could have wider implications. That’s because it seems all relevant commissions need declaring, meaning this might spill over into other financial products beyond car finance.

Of course, we don’t know how this will play out. The Supreme Court might yet overturn the court ruling, while scary headline figures — £3.9bn, for example — can often end up wide of the mark.

Sill, there’s now a dark cloud of uncertainty hanging over the stock, and I doubt it’ll lift any time soon. If the dividend rises in 2025, will it be accompanied by a falling share price? This worries me as a potential investor.

I’m going to avoid Lloyds shares for now and see how things develop. If the mis-selling crisis mushrooms into something far larger, then there could be buying opportunities in bank stocks on the horizon.

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.

Ben McPoland has positions in HSBC Holdings. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, and Lloyds Banking Group 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

Is a Trump presidency my chance to earn a second income by investing in FTSE 100 oil stocks?

Is a second term in office for Donald Trump combined with big dividend yields from Shell and BP a golden…

Read more »

Cropped shot of an affectionate young couple posing with a bunch of flowers in their kitchen on their anniversary
Investing Articles

Could this FTSE 100 winner be the next addition to my Stocks and Shares ISA?

A business that can charge lower prices than the competition while maintaining wider margins could be a winning combination for…

Read more »

Investing Articles

Marks and Spencer shares smash through 400p. Is there more to come?

Marks and Spencer shares leap higher following a very encouraging set of half-year numbers. Our writer looks at whether this…

Read more »

Renewable energies concept collage
Dividend Shares

A renewable energy dividend stock with an 11.5% yield? Tell me more!

Jon Smith explains why he feels this dividend stock from a key sector with a high yield could be sustainable…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Growth Shares

Could this UK uranium stock soar in the nuclear energy boom?

This UK stock offers direct exposure to uranium. So, it could do well if the nuclear energy market takes off…

Read more »

Illustration of flames over a black background
Investing Articles

Could the stock market crash in 2024? Here’s what I’m doing!

Some are predicting a global stock market crash led by US equities. Our writer gives his verdict and explains his…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Growth Shares

The AstraZeneca share price just fell 8.4% in a day. Is it time to consider buying?

The AstraZeneca share price has fallen almost 25% since late August. Is there value on offer for investors after this…

Read more »

Investing Articles

Up 66%, is this FTSE 250 share still too cheap to ignore?

This FTSE 250 firm operates in a competitive sector but has outperformed most of the market since the start of…

Read more »