Lloyds (LSE: LLOY) shares have long been prized for their dividends. Before the financial crisis, the FTSE 100 bank was routinely described as an income machine. Afterwards, that label was dropped. There were no dividends for five years.
Even when shareholder payouts resumed in 2014, investors got just 0.75p per share. Then the pandemic got in the way. Yet over the last three years, everything has swung back in Lloyds’ favour.
The Lloyds share price has surged from 42p to around 111p, an increase of 165%. And in each of the last three years, the board has increased the total shareholder payout by an inflation-smashing 15%.
Look how well this FTSE 100 stock has done
Investors have been getting dramatic share price growth, with generous income on top. It’s been win-win, with the total return nudging 200% with dividends reinvested. I bought Lloyds in May 2023, so I’ve been winning too.
Share price growth is never guaranteed, nor are dividends. Markets are volatile and cyclical. That’s the short-term price we pay for the long-term wealth-building potential of equities.
After a strong performance, certain things happen. Shares get more expensive, while yields typically fall. That’s the case here.
Three years ago, Lloyds shares looked dirt cheap to me. The price-to-earnings (P/E) ratio was around seven, less than half the FTSE 100 average. The dividend yield was around 5%.
It’s a different story today, with the P/E ratio nudging 16, while the trailing yield has slipped to 3.2%. Lloyds isn’t quite the bargain it was.
Is the bank still worth buying?
Yet I’m not too glum. Earnings are expected to keep rising, reducing the forward P/E to a modest 11.1 for the 2026 reporting year. The P/E for 2027 is just 9.32. These are forecasts, of course, not promises.
The dividend also has an upwards trajectory. Lloyds’ results on 30 July were positive, with net income up 10% to £5bn in Q2 and underlying profit up 9% to £2.2bn. Net interest margins widened from 3.04% to 3.22%, a key profitability measure.
The board announced an interim dividend of 1.58p. That’s an increase of 30% on last year’s 1.22p. Double the dividend growth seen in the last three years.
The forecast yield for 2027 is 4.89%. If somebody had £20,000 in an ISA invested in Lloyds at the end of this year, they could expect £978 of dividend income in 2027.
Of course, that’s not guaranteed. Profits could take a hit if the UK and global economies struggle, hitting mortgage demand and driving up loan impairments. This year’s autumn Budget could hit banks with a higher windfall tax. Either could hit the share price and dividend outlook.
That’s always the risk with shares. But I still think Lloyds is worth considering. It’s starting to look like an income machine once again, and with luck, investors will get growth on top. Not convinced? There are more great dividend growth stocks on the FTSE 100 today.
Should you invest £5,000 in Lloyds Banking Group Plc right now?
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Harvey Jones owns shares in Lloyds.
This story originally appeared on Motley Fool
