Lloyds Banking Group (LSE: LLOY) shares have climbed more than 40% so far in 2025, and they’re up 180% in the past five years.
That’ll please a lot of shareholders, but there’s a downside. Investors looking for dividend income today would have to settle for a yield of 4.1%. It’s been higher in the recent past, which is one of the good things about a fallen share price.
If dividends are maintained, the percentage return every year from an investment that’s seeing its price falling can be significantly higher. Now, that’s quite a big ‘if’. Share prices often fall because a company faces difficulties. And a brief high dividend yield isn’t so good if the company has to cut it.
Dividend safe
Thankfully that didn’t happen with Lloyds. There was definitely a risk buying while the shares were down and the yield was up. But I don’t think it was too big a risk as I didn’t see much wrong with the business itself.
So it’s too late to lock in the 6% or 7% we could have had not too long ago. But I don’t see that as any reason to turn our noses up at the 4.1% currently forecast. And looking further forward, analysts expect it to get back up as high as 6% by 2027 based on today’s Lloyds share price.
The main danger I see now, however, is the Supreme Court’s investigation into motor finance mis-selling. That could cost Lloyds dearly and might even hit the dividend. But I still think long-term dividend potential makes it one to consider.
Anyway, what might a £10,000 investment in Lloyds shares at today’s 4.1% dividend earn us?
It seems straightforward enough, with 4.1% of £10,000 working out at £410. So that would be £410 a year in our pockets, equivalent to £4,100 every 10 years. Except, by 2027 we could be looking ar £600 per year. And who knows how much further it might go in the years after that.
Price rises, yield falls
If the share price rises though, that would knock the percentage yield back down again as it’s done in the past few years. That wouldn”t apply to an investment made today, mind. The headline yield might drop compared to future higher share prices. But if the forecasts come good, the return we’d actually receive would be based on the price we pay today to buy the shares.
And just counting the cash misses out on the best part of it all. How far can we boost our returns if we use the annual dividend cash to buy more?
My calculations suggest we’d make a total of approximately £4,950 over the next 10 years. That might not be a huge amount more than the £4,100 from just the straight dividend cash. But what about 20 years?
Reinvesting the same dividend for 20 years could push our profit up to £12,340. Pocketing the cash and not reinvesting it would make us just £8,200.
It clearly pays to reinvest our dividend cash and let the magic of compounding pile up our profits for as long as we can. But don’t forget to diversify to help mitigare the risk of individual companies. I think Lloyds is one to consider.
