Image source: Getty Images
Lloyds (LSE:LLOY) shares are at the heart of my self-invested personal pension plan (SIPP) and I don't expect that to change. I expect to hold them for life.
I can't guarantee that will happen. Even blue-chip companies like Lloyds can go under. It would have gone under during the financial crisis if taxpayers hadn't stepped in with £20.3bn.
Today, it is a modest home-based operation, focused on personal and small-business banking, but what it has lost in enthusiasm it has gained in reliability.
The dividend star of the FTSE 100 index
That hasn't stopped the stock from gaining 38.58% over the past 12 months. Add to that a cumulative dividend yield of 4.73% and you get a total return of 43.31%.
Holding Lloyds shares is riskier than keeping money in the bank. My capital could go down rather than up. Dividends are also not guaranteed. Both depend on Lloyds making a profit and maintaining cash flow.
Lloyds is connected to the UK economy and things seem to be looking up at the moment. GDP grew by 1.3% in the first half of this year. The Bank of England has cut interest rates once and may cut them twice more in 2024.
The interest rate cuts will have mixed effects for Lloyds. The positive side is that they should revive the property market. Lloyds is the UK's largest lender, so this could be a real boon. But there are also potential negatives.
Falling interest rates will hit net interest margins – the difference between what Lloyds pays savers and what it charges borrowers. The squeeze has already begun. First-half results published on July 25 showed margins narrowing from 3.18% to 2.94%. Profits fell 14% to £3.2bn. Higher operating expenses did not help.
In the 2023 financial year, Lloyds paid a total dividend of 2.76 pence per share. This is expected to reach 3.1 pence in 2024, an increase of 12.4%.
Top-line growth
Let's say I'm fed up with working and want to retire. According to the Pensions and Lifetime Savings Association, a single person needs £31,300 a year to have a “moderate” income in retirement. I'm not single, but let's not complicate things.
I am on track to receive the full state pension, which currently stands at £11,502. That leaves me with another £19,798 to pay.
To generate that amount from Lloyds alone, I would need to buy 638,645 shares (based on its planned dividend of 3.1p per share). At the current price of 58.34p, that would cost me a whopping £372,585 – which, oddly, I don’t have to hand at the moment.
Even if I did, I wouldn't invest it all in one stock, even one as solid as Lloyds. I would try to supplement the income it pays with a few stocks that offer higher yields. If my portfolio as a whole yielded 6%, I would get the same income of £19,798 from £329,967. That's £42,618 less. Any share price growth will add to that.
My income should also increase over time as companies increase their dividends.
This gives me an idea of the size of the fund I need to fund a decent retirement income from FTSE 100 shares. I'm not there yet, but I should be when I retire. And my Lloyds shares have a key role to play.
