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At the beginning of 2021, the dividend yield of Lloyds Banking Group (LSE:LLOY) was 0%. Since then, things have improved. Lloyds shares now comfortably outperform FTSE 100 average. Looking ahead to 2024, does it make sense to buy stocks now for a second income?
Let's get the numbers
In 2023, Lloyds paid two dividends totaling 2.52 pence. This gives a current yield of 5.93%.
The forecast for next year is that it will increase considerably to reach 3.2p. The share price has traded in a range of 40-54p this year. So if I take an assumed price of 47p for next year, it would give me a dividend yield of 6.8%.
I have to take a ballpark price, but clearly the share price could be higher or lower next year, which will affect performance.
Looking at the rest of the index
It is difficult to call an action a “obvious purchase” without comparing it with various alternatives. To start, how does potential performance for next year compare to the FTSE 100 as a whole? The average dividend yield is currently 3.9%.
This figure will fluctuate next year, but is highly unlikely to rise to 6.8%. So if I compare Lloyds shares to a FTSE 100 index earnings tracker, I can see a clear favourite.
Comparing the banking sector
The next stage is to reach out to Lloyds' main competitors. After all, if I already have a diversified income portfolio, I might just want to include one additional banking sector stock.
To determine whether it should be Lloyds or not, I can look at the returns of the major banks.
I can immediately spot a problem. Even without considering dividend forecasts for next year, both HSBC (6.9%) and NatWest (7.52%) have higher yields than Lloyds. By the way, most of the major banks I analyzed have positive dividend forecasts for next year.
Of course, not all banks can meet the requirements for the type of business I want. For example, Lloyds and NatWest are predominantly UK banks. HSBC is global in nature. This might influence my decision to stay away from just the cold numbers.
On par with the best
To be in the top 10% of the FTSE 100 in terms of returns, Lloyds would need to exceed 7.5%. I don't see it reaching that level anytime soon.
If I try to answer the question in the title, I can see that the bank is not even close to being one of the best performers or being the best in the sector. However, I would say it's a no-brainer to consider purchasing it versus a passive income tracker fund.
The other point to remember is that this test has focused exclusively on income figures. This is actually a limited way to look at buying stocks. I need to consider many other points (e.g. financials, industry outlook, etc.) before reaching a more informed conclusion.
