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Lloyds (LSE:LLOY) shares have long been a popular destination for dividend investors. Earnings can drop during economic downturns, but robust balance sheets still give retail banks like this the firepower to pay large and growing dividends, broadly speaking.
So what are the dividend forecasts like for this FTSE 100 operator? Pretty attractive, if I’m being honest.
Dividend growth
It took Lloyds a little while to repair its financial foundations following the great financial crisis in 2008. But having done so, and then resurrected its dividend policy in the mid-2010s, shareholder payouts have risen in eight of the following 10 years.
The only exceptions came in 2019 and 2020, following demands from the Prudential Regulatory Authority (PRA) for banks to suspend dividends and share buybacks during the Covid-19 crisis.
Since then, the dividends on Lloyds shares have risen sharply. It’s a trend City analysts expecting to continue, meaning dividend yields shoot further ahead of the FTSE 100’s long-term average of 3% to 4%.
| Year | Dividend per share | Dividend growth | Dividend yield |
|---|---|---|---|
| 2025 | 3.58p | 12.9% | 4.3% |
| 2026 | 4.13p | 15.4% | 5% |
| 2027 | 4.78p | 15.7% | 5.7% |
Strong forecasts
Yet, dividends are never, ever guaranteed. And so I need to consider how realistic broker forecasts are (barring a catastrophic event like another global pandemic).
On balance they’re pretty robust, in my opinion. Predicted dividends are covered 2.1 times by expected earnings for this year. The figure rises to 2.3 and 2.4 for 2026 and 2027, too.
Any reading above one provides a broad cushion in case earnings get blown off course. This is especially valuable in my opinion, given the uncertain outlook for interest rates and the UK economy and the implication for Lloyds’ profits.
In addition, the Black Horse Bank’s balance sheet is well capitalised, providing added strength to dividend estimates. Its CET1 capital ratio was 13.8% as of June, comfortably above its target of 13% for the end of 2024.
Is Lloyds a buy?
On balance, then, Lloyds appears to be one of the FTSE 100’s most robust dividend shares. But whether you’re investing for income or otherwise, it’s important to also consider the share price outlook of a company when choosing stocks to buy.
Lloyds’ share price has risen an impressive over a 12-month horizon. But I fear a potential heavy reversal as inflationary pressures rise, the labour market weakens, and the broader ecomony stagnates. In this environment, retail banks face the prospect of disappointing revenues and rising loan impairments.
Bad loans at Lloyds spiked to £442m in the first half from £100m in the same 2024 period, underlining the scale of the threat.
I’m also concerned about the outlook for the bank’s mortgage division, a key earnings driver. On the plus side, higher inflation and its impact on interest rates will support net interest margins (NIM). Latest results showed these at 3.04%.
But fewer interest rate cuts than previously hoped poses a significant threat to home sales and by extension mortgage demand. Lloyds also faces intensifying competition in this market from other banks, building societies, and increasingly aggressive challenger banks.
All this creates too much risk for my liking. Lloyds looks in good shape to meet near-term dividend forecasts. But I’d rather find other stocks to buy for passive income.
