As Lloyds shares stumble, is that dividend yield safe?

Lloyds‘ (LSE: LLOY) share price has stumbled, falling 5% in the last month. That’s nothing to panic about. Lloyds’ shares are still up 30% over one year and 147% over five. Plus some juicy dividends on top.

Recent weakness reflects wider economic concerns rather than anything going badly wrong at the FTSE 100 bank. After a terrific run for the sector, some investors may simply be taking profits.

But things could get bumpier as unemployment, food prices, energy bills and mortgage rates rise, squeezing consumers and businesses. As a Lloyds’ shareholder, I’m expecting the shares to slow. These things go in cycles. But I’m curious about the dividend. Can it keep growing?

A strong dividend record

Right now, things look good. Lloyds has increased its ordinary dividend by roughly 15% a year for the last three years. The total full-year payout has climbed from 2.76p per share in 2023 to 3.17p in 2024 and 3.65p in 2025. The board recently increased the 2026 interim dividend by an even more impressive 30% to 1.58p.

With the shares at around 110p, the trailing yield’s 3.3%. The forecast 2026 dividend of about 4.01p gives a prospective yield of around 3.6%. That isn’t spectacular compared with some of my FTSE dividend income favourites, but it’s partly down to the fact that Lloyds’ shares have gone gangbusters.

So what about dividend cover? Pretty good actually. It generated 7p of earnings per share in 2025 against a 3.65p ordinary dividend, giving cover of almost two times.

The first half of 2026 showed the bank’s still making bags of money. Statutory profit after tax rose 23% to £3.1bn, while net income increased 9% to £9.7bn. Return on tangible equity reached 17.1%.

Balance sheet looks healthy

Lloyds generated 108 basis points of capital and finished June with a pro forma CET1 ratio of 13.1%. And that’s after the dividend and a £1bn share buyback. Management expects more than 200 basis points of capital generation for 2026.

Lloyds says it intends to maintain a CET1 target of around 13% and has described its dividend policy as progressive and sustainable. The board says the latest increase reflects its strong capital position and confidence in future earnings. That’s reassuring.

There are risks. Lloyds expects 2026 net interest income of more than £14.9bn, but growth will inevitably become harder after such a strong period. A weaker economy could hit demand and increase bad debts.

Windfall tax risk

There’s growing speculation the government could hit banks with some form of windfall tax in the Autumn Budget. That would potentially reduce the money available for distributions.

I think Lloyds’ shares are likely to slow. They’re more expensive now, with a price-to-earnings ratio of 15.6. High inflation and interest rates may continue to protect margins though. Overall, I believe the dividend looks safe, although we can never say for sure.

I still think Lloyds is still worth considering. The yield isn’t huge, but with luck should continue to climb. But another FTSE dividend stock also tempts me right now…

What income stock do we like better than Lloyds Banking Group Plc right now?

One of our Share Advisor analysts has just released a brand new stock report that we think is a must-read for any investor looking to try and generate potential income.

And the best bit is that you can see if for yourself, right now, absolutely free of charge!

No jargon. No hard sell. Just a clear look at an income share we think is worth your time.

Harvey Jones owns shares in Lloyds.