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Banking is usually a very worthwhile line to be in. Take Lloyds (LSE: LLOY) for instance. Final 12 months, the black horse financial institution reported post-tax earnings of £5.5bn. It delivered a second consecutive 12 months of double-digit share development. The Lloyds dividend yield is 5%.
That’s above the common of the financial institution’s FTSE 100 friends, though beneath another well-known shares. Natwest yields 5.5%, for instance, whereas HSBC is on 7.1%. In reality, HSBC has risen 143% since September 2020, so if I had had the foresight to purchase its shares then, I might now be incomes a dividend yield of round 17% on my funding!
I already personal Natwest shares. Might the Lloyds dividend outlook persuade me so as to add the shares to my ISA?
Uneven dividend historical past
As dividends are by no means assured, realizing what has occurred prior to now will not be essentially a helpful information to what could occur in future.
In 2020, for instance, the Lloyds dividend was all of the sudden frozen, together with these of different British banks on account of a regulatory requirement.
Nonetheless, the long-term historical past of the Lloyds dividend unsettles me.
Created utilizing TradingView
The chart exhibits a few issues that concern me.
One is the large drop within the Lloyds dividend after the final monetary disaster. It has by no means acquired again to something prefer it was once (and neither has the share value, come to that).
Moreover, the dividend has not even reached its pre-pandemic stage once more.
That’s regardless of the corporate’s mammoth earnings and free money flows massive sufficient to launch a £2bn share buyback programme this 12 months.
Created utilizing TradingView
Sturdy property, unsure market
That makes me assume that present administration merely doesn’t see the dividend as a really excessive precedence. Certainly, that was one cause I bought my Lloyds shares final 12 months. Sure, the dividend has elevated sharply, nevertheless it has not acquired again to the place it was in 2019 regardless of the financial institution being flush with money.
Wanting again to the monetary disaster, my concern is that banking is a cyclical enterprise. For now, Lloyds is doing properly. It has a well known model, enormous buyer base, and the nation’s largest mortgage ebook. These are strengths when the property market is powerful. If it tumbles, although, a big mortgage ebook may very well be a supply of huge losses, not earnings.
British banks typically look in higher monetary form now than they did going into the final monetary disaster, due partly to extra stringent liquidity necessities. Nonetheless, the danger of one other property crash weighs on my thoughts as an investor.
I really feel higher rewarded for that threat proudly owning financial institution shares with a better yield than the dividend Lloyds provides me at its present share value.
That’s the reason I plumped to dip my toe again into the banking waters by shopping for Natwest shares as a substitute. I’ve no plans to purchase Lloyds shares.
