Shares in Lloyds Banking Group (LSE:LLOY) currently come with a 4.5% dividend yield. But the big issue for investors is whether or not that’s going to grow.
I think there’s a compelling argument to be made for the claim that it needs to. And with the stock up almost 30% since the start of the year, I think investors should be careful.
Dividend yield
A 4.5% dividend yield isn’t bad. Even if Lloyds just maintains its shareholder distribution from there, I think it’s going to be more than enough to outpace inflation over time.
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The trouble is, a 10-year UK government bond currently comes with a yield of 4.7%. That means income investors can likely get a better return over the next decade with less risk.
From a dividend perspective then, Lloyds shares only make sense over the next 10 years if the bank is going to return more cash than it does right now. But there’s reason for optimism.
Analysts are anticipating that Lloyds will increase its dividend quite significantly by 2027. A summary of their expectations is below:
| Year | Dividend per share | Year-on-year growth (%) | Yield at 70.58p share price |
|---|---|---|---|
| 2024 | 3.17p | – | 4.52% |
| 2025 | 3.43p | 8.2% | 4.9% |
| 2026 | 4.07p | 18.7% | 5.8% |
| 2027 | 4.67p | 14.7% | 6.7% |
If things go according to these estimates, then income investors could do very well with Lloyds shares over the next 10 years. They’re set to return more than the 10-year bond from this year on.
When it comes to share investing though, returns aren’t guaranteed. And this is especially true of dividends and even more so when it comes to banks.
Pass the salt
It’s not that I’m bearish on Lloyds as a stock. I’m not and I like the bank’s competitive position very much. But I think investors need to be wary when it comes to future dividends.
The banking sector as a whole can be very cyclical and this can weigh on dividends. But there are also specific reasons to be wary about Lloyds shares in particular.
For over a year, the bank has been at the centre of an investigation into the misselling of car loans. This is set to be heard in the Supreme Court in April and it could go one of two ways.
According to some analysts, Lloyds might well find itself in the clear. Others, however, are suggesting this could be the most significant issue for the industry since the PPI scandal.
I don’t have a view on which way the case will go. But with the stock up almost 30% since the start of 2025, I think the share price is starting to reflect expectations of a positive outcome.
In any event, the possibility of significant liabilities coming from the case can’t be ignored. And that means investors should take analyst predictions with a bigger pinch of salt than usual.
Wait and see?
One way or another, the Supreme Court hearing looks set to be extremely significant for Lloyds. But the uncertainty is a risk that I find hard to ignore.
I think there are some really good opportunities in the UK stock market at the moment. Given this, I don’t see the need to take a chance on something that’s hard to predict.
