Lloyds (LSE: LLOY) shares were on my radar for years before I finally loaded up in 2023. By then, the FTSE 100 bank looked far too cheap to ignore. It was trading on a price-to-earnings (P/E) ratio of around seven, with a dividend yield topping 5%. My only worry was that the low price might be a warning sign rather than an opportunity.
Why wasn’t everybody else buying at that low price? Was I missing something? Apparently not.
The shares are up 40% in the past 12 months and 97% over two years. Investors have also bagged lots of juicy dividends on top. Despite that rally, today’s price of around 83p still leaves Lloyds well short of the £1 mark that many investors have been hoping for. There could be more fun to come. Time will tell.
FTSE 100 winner
First-half results published on 24 July showed solid though hardly spectacular progress, with pre-tax profit up 5% to £3.5bn. Net income climbed 6%, offset by higher costs and impairments. Chief executive Charlie Nunn said the bank’s financial strength gave it confidence in its 2025 guidance and 2026 targets, while underpinning higher distributions.
After such a strong run, the stock isn’t the bargain it was a couple of years back, with the P/E now climbing to 13.2. As the share price rises, the dividend yield naturally falls, and now stands at 3.8% on a trailing basis. That’s slightly above the FTSE 100 average but well down from the bumper levels when I bought in.
The board’s committed to progressive payouts though. In July, management rewarded shareholders by hiking the interim dividend 15% to 1.22p a share.
Stock rises, yield falls
The forecast yield for 2025 is 4.27%, rising to 4.99% in 2026, which is encouraging. For income investors, this could still make Lloyds appealing, even if it no longer looks like a bargain.
So how many shares would it take to generate dividend income of £125 a month, or £1,500 a year? Based on 2025’s forecast dividend per share of 3.43p, the answer is 43,732 shares.
At today’s price of 83.16p, that would cost £52,588, way above the £20,000 Stocks and Shares ISA allowance. That’s also a hefty outlay for one stock, which highlights the importance of diversification across different income shares. There are higher yields on the FTSE 100 today, some as high as 7% or 8%.
Lloyds looks solid but we should never forget the financial crisis. The motor finance mis-selling scandal rattled investors too, and although its impact appears to have been contained, it’s a reminder that regulatory risks are always hovering when investing in big banks.
Lloyds is still heavily exposed to the UK economy, given its reliance on mortgage lending and savings. With affordability stretched, mortgage demand may remain patchy. Inflation is sticky too, making customers feel poorer, while interest rates may also drive up debt impairments.
I think the shares are still worth considering to buy today, even if the valuation’s higher and the yield a little lower. The long-term rewards are likely to come through steady growth compounded by reinvested dividends, rather than another sudden share price surge. I think that’s the best way to view Lloyds shares today. In fact, I think it’s the best way to view any stock, at any time.
