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I just started adding Lloyds (LSE:LLOY) I added shares to my self-invested personal pension fund (SIPP) in June last year, and they are already among my favourite investments.
My timing was right. After years of stagnation, Lloyds’ share price has finally come to life. It is up 32.48% over the past 12 months. It has exceeded expectations. FTSE 100 Index as a whole, which grew a relatively modest 10.05%.
After a good run, I wouldn't be surprised to see Lloyds' shares slow down. First-half profits fell 14% to £3.2bn, due to higher operating expenses and lower net interest income. Net interest margins, the difference between what banks pay savers and what they charge borrowers, narrowed from 3.18% to 2.94%.
FTSE 100 star
They may be cut further if the Bank of England cuts interest rates again. The mortgage market is incredibly competitive at the moment. As Lloyds is the biggest player, it cannot afford to be outpriced.
Chief Executive Charlie Nunn said the group is on track to meet its 2024 targets and expects to meet its 2026 strategic goals and directions as well.
With a share price of 57.3p and a forward price-to-earnings (P/E) ratio of just 9.73 times, I still think Lloyds shares look good value for money. Its price-to-book ratio is just 0.7, below the value of the assets on its balance sheet.
Even if the stocks remain dormant for a while, I have no problem with them. I plan to hold them for five, ten, fifteen years, and hopefully much longer. That gives me plenty of time to accumulate capital and grow. Along the way, I will reinvest any dividends I receive.
The cumulative dividend is down to 4.9%. That doesn't worry me. It's still above the FTSE 100 average of 3.78%. Plus, shareholder payouts are comfortably covered by earnings at 2.8 times, giving plenty of room for growth.
Dividend income and growth
For the full year 2023, Lloyds paid a total dividend per share of 2.76 pence. Analysts estimate that payments will increase at an average annual rate of 12.4% over the next three years. If they are right, I will receive 3.10 pence per share in 2024, rising to 3.49 pence in 2025 and 3.92 pence in 2026.
I currently own 9,657 shares. If the forecasts are correct (and they are just forecasts), I can expect to receive dividends of £299.37 in 2024, rising to £377.03 in 2025 and £378.55 in 2026.
In fact, I will get a little more, because I will reinvest every dividend. More shares equal more income. I estimate £380 in 2026.
I bought my Lloyds shares at an average price of 43.616p. In total, they cost me £4,222 before charges. If I earn an income of £380 in 2026, including reinvested dividends, that equates to a 9% yield based on my original purchase price.
That's a lot more than today's headline rate. Dividends aren't guaranteed, of course. Lloyds will be forced to cut shareholder payouts if it doesn't generate enough cash to fund them. However, if Lloyd's keeps this up, I'll get a brilliant and growing return. Especially when you take into account what I originally paid. I expect further share price growth down the road, but I'll count that as a bonus.
