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Lloyds (LSE: LLOY) shares are renowned for their dividends. Before the financial crisis in 2008, the FTSE 100 bank was routinely described as an income machine.
It took well over a decade to recover from that debacle, but lately the dividends have been flowing again. When I bought the stock in 2023, the forecast yield was comfortably above 5%. Yet when I look at the headline numbers today, the trailing dividend yield is just 3.3%. That doesn’t look so impressive. Especially when it’s possible to get 4.5% a year from an easy-access savings account.
The yield tells only half the story
Has something gone wrong? Weirdly, it’s more a case of something going right.
When a stock rises, the yield falls. That’s because yields are calculated by dividing the dividend per share by the share price. A higher share price therefore means a lower yield, assuming the dividend stays unchanged.
That’s why a sky-high yield can be a warning signal. It’s often a sign of a plummeting share price. That certainly isn’t the case here.
The Lloyds share price is up a stunning 168% in the last three years, from around 41p to 111p. It’s still humming along, up 37% over the last 12 months.
Over the last three years, the board has increased shareholder payouts by an inflation-busting 15%. That looks set to continue. The forward yield is 4.15% for 2026, rising to 4.85% for 2027. Which is a bit better.
The bank has plenty of financial firepower
Latest results, published on 30 July, showed first-half net income hitting £9.7bn, up 9% year on year. Statutory profit after tax jumped 23% to £3.1bn.
The bank increased its interim dividend by 30% to 1.58p a share and announced a £1bn share buyback. That took total capital returns to £1.9bn for the first half. Lloyds shareholders aren’t doing too badly.
Yet this isn’t quite the income machine of yore. In 2007, just before the financial crisis struck, it paid a total full-year dividend of 23.33p. In 2025, investors got just 3.65p. However, the shares are cheaper today, so it’s not directly comparable.
I have another concern. Lloyds shares look more expensive today, with a price-to-earnings ratio of 16. Again, that’s down to that growth. And the forward P/E falls to a more modest 11.2.
The UK economy is going through a bumpy patch, and many fear the AI bubble could burst, triggering a stock market crash. Neither would be good for Lloyds. All the banks have done well out of high interest rates, which helped them widen margins. That could reverse if rates fall, as some expect next year. There’s also the risk of a UK windfall tax increase in next month’s Budget.
I still think Lloyds shares are worth considering for both long-term income and growth. Especially in a market dip. I can see plenty of other top FTSE 100 income stocks out there, and some offer much bigger yields.
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Harvey Jones owns shares in Lloyds.
This story originally appeared on Motley Fool
