Based on dividends paid over the past 12 months, Lloyds Banking Group (LSE:LLOY) shares are currently (18 October) offering a return of 3.9%. Although this is above the FTSE 100 average, there are plenty of stocks on the index returning more at the moment.
In fact, 21 are yielding 4%+, including Legal & General (7.4%), which — until the promotion of Ithaca Energy from the FTSE 250 in September — was the highest-yielding on the Footsie.
However, analysts are expecting Lloyds to significantly increase its dividend over the next five years. Assuming their forecasts are accurate, what’s the forward yield on the bank’s stock? Let’s take a closer look.
Seeing into the future
Prior to the release of its earnings each quarter, the bank publishes a summary of the forecasts of the analysts covering the stock. Ahead of its half-year earnings report in July, the consensus 2030 dividend prediction was 7.84p. Based on a current share price of 103p, this implies a forward yield of 7.6%.
However, Lloyds performed better than expected and, as a result, declared an interim dividend that was 9.7% higher than forecast. If we assume that the next set of predictions for the 2030 payout will be raised by the same amount, the bank’s forward yield rises to 8.5%.
This far exceeds anything currently on offer from a high street savings account or government bonds. It’s one of the reasons why many people like to invest in dividend shares. But Lloyds isn’t the only potentially high-yielding stock on offer.
Such as?
For example, if Legal & General raises its 2025 dividend by 2% a year through to 2030, it will be paying 24.05p a share. With a current share price of 296p, the pension and savings group’s stock has a forward yield of 8.1%.
Lloyds is unusual in publishing forecasts that look so far into the future. There’s nothing comparable publicly available for Legal & General. However, the group’s directors have pledged to increase the 2026 and 2027 payouts by 2% per annum. Only time will tell whether it’s realistic to assume this will continue in 2028 and beyond.
Even so, these figures illustrate that Lloyds could beat the yield on Legal & General’s shares within five years.
Back down to earth
However, we must be cautious. A five-year (or shorter) forecast could prove to be wildly inaccurate. As a result, dividends can never be guaranteed.
Indeed, threats to Lloyds’ payout include a UK economic downturn — resulting in higher loan defaults and a lack of new business — as well as a windfall tax on its earnings. By 2030, analysts are expecting earnings per share to rise by 144% compared to 2025. This feels overly optimistic to me.
Final thoughts
Given that the UK economy is proving to be more resilient than many were expecting, I suspect Lloyds will be able to grow its earnings — and its dividend — over the next few years. And it wouldn’t surprise me if its yield climbed higher. That’s because I believe its dividend will rise quicker than its share price. I reckon many investors have already priced in much of the anticipated improvement in profitability.
On this basis, I think Lloyds could be an interesting share for income investors to consider. However, it’s not the only opportunity on my radar right now…
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James Beard does not hold any positions in the companies mentioned.
