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Lloyds‘ (LSE:LLOY) shares are by far one of the most popular investments in the UK. While the banking stock hasn’t been the best performer over the years, its large size, stability, and critical place in Britain’s economy make it quite attractive among more conservative investors. Not to mention, the group’s 4.1% dividend yield, which makes it an alluring source of passive income, especially now that profits are benefiting from higher interest rates.
But how much passive income can investors make with this stock? Let’s explore.
Inspecting Lloyds’ dividend
At the current share price, anyone with around £7,800 to spare can snap up 10,000 shares in Lloyds today. That’s a nice big round number. And with trailing 12 months dividends per share at 3.17p, such an investment would instantly unlock a passive income of £317 a year.
Of course, this calculation assumes that Lloyds doesn’t cut shareholder payouts moving forward. But looking at the latest analyst forecasts, the consensus suggests that doesn’t seem likely. Stronger earnings are paving the way for excess cash flows. As such, dividends by the end of 2025 are expected to reach 3.46p before climbing even further the following year to 4.12p.
In other words, by 2026, those 10,000 shares could be generating closer to £412. And that number could be even higher for those who decide to reinvest any dividends received along the way.
With that in mind, is this a no-brainer stock to buy for income-seeking investors?
Taking a step back
While the prospect of earning a market-beating dividend yield’s exciting, it’s important to remember that even the biggest businesses have their risks. Lloyds’ financial position looks robust, but there’s the upcoming potential fallout surrounding the UK motor finance scandal.
Management has already put aside £1.2bn to cover any potential legal penalties should the courts rule against lenders. But if legal experts are correct, the fallout could be considerably larger, potentially compromising profits and, in turn, dividends.
Furthermore, as the UK’s largest mortgage lender, Lloyds is highly sensitive to the British housing market. Conditions have generally been improving as mortgage rates have tumbled thanks to interest rate cuts from the Bank of England.
However, with the recent increase in Stamp Duty kicking in, mortgage approvals in April took a notable hit, falling to 60,463 versus the 63,000 analysts were expecting. Is that a disaster? No. But it does make Lloyds’ life harder in terms of achieving growth and expanding its dividend.
The bottom line
As a business, Lloyds isn’t likely to disappear any time soon. As a stock, the short-term outlook’s growing increasingly uncertain, in my opinion. So despite its popularity and seemingly lucrative dividend potential, I’m not rushing to add it to my portfolio today.
