Should I buy Lloyds shares above £1 for passive income?
It’s been a rip-roaring couple of years for FTSE 100 bank stocks, particularly Lloyds (LSE:LLOY) shares. Since February 2024, they’ve climbed nearly 150% while pumping out above-inflation dividend growth.
Indeed, Lloyds stock finally broke through the £1 psychological barrier this month — the first time in 17 years! It’s currently just under 103p.
After selling British American Tobacco last year, there’s space in my portfolio for another dividend stock. Is Lloyds the one to fill it?
Hedging risk
FTSE 100 banks have emerged from their decade-long spell in the wilderness following the financial crisis in 2008. And it was another global crisis that helped spark the turnaround, namely the pandemic, which triggered surging inflation and then higher interest rates.
As a result, net interest margins have fattened across the sector, boosting profits, dividends, share buybacks, and investor sentiment. The feared wave of mortgage defaults from higher rates hasn’t materialised, thankfully.
But with interest rates widely expected to continue trending downwards in 2026, are Lloyds’ profits about to evaporate? Well, not really because banks put in place various structural hedges to manage such risk, meaning things are a little more complicated than it would seem.
Long story short, the lender’s earnings are not about to fall off a cliff, even as rates fall and the UK economy flatlines.
Hedges put on during the period of ultra-low interest rates in 2020 matured during 2024 and 2025 which means banks have an opportunity to put on new hedges at todayâs higher rates…Analysts believe this could give banks an income boost by protecting net interest margins through the next few years even if the Bank of England cuts short-term interest rates.
AJ Bell.
Dividend forecast and valuation
Due to this and aggressive buybacks, which are lowering the share count, earnings per share (EPS) growth at the Black Horse bank still looks very strong moving forward. EPS is projected to rise around 28% this year then another 20% in 2027.
Consequently, the dividend prospects also look attractive, with 16% growth in the payout pencilled in for this year. There looks to be a solid margin of safety too, though I note the forecast yield is only 4.1% versus more than 6% a year ago. In this sense, I’m late to the party.
What about valuation? Well, despite the rocketing share price, the forward price-to-earnings (P/E) ratio is 10.5. While that’s above NatWest (9.2) and Barclays (9.1), I don’t consider it dangerously high.
That said, Lloyds is trading at its highest price-to-book (P/B) multiple in years (1.55), so I also don’t see it as an obvious bargain.
Should I buy Lloyds stock?
Lloyds is the UK’s largest mortgage lender, with a roughly 19% share, as well as the largest credit card issuer. As such, it enjoys a powerful position at the heart of the UK economy.
Longer term, however, the domestic lender’s fortunes will ultimately be tied to the financial health of UK households and businesses. And sadly, I currently see no sign that things are heading in the right direction on this front (growth is anaemic, unemployment is rising, and business regulation is burdensome).
The 4.1% forecast yield is not enough to tempt me to invest for passive income. At the moment, I see better income opportunities elsewhere across the UK financials sector.
The post Should I buy Lloyds shares above £1 for passive income? appeared first on The Motley Fool UK.
Should you invest £1,000 in Lloyds Banking Group plc right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Lloyds Banking Group plc made the list?
More reading
- Lloyds shares: here are the latest growth and dividend forecasts
- Prediction: in 1 year, the Lloyds share price and dividend could turn £10,000 into…
- At £1, can the Lloyds share price be justified?
- Here’s what £10,000 invested in Lloyds shares 2 years ago is worth now
- £5,000 in savings? Here’s 1 way to try and turn it into maximum passive income
Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Aj Bell Plc, Barclays Plc, British American Tobacco P.l.c., and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
