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Could Lloyds Banking Group (LSE:LLOY) shares generate reliable dividend income in the next few years? Analysts seem to think so.
The current forecast is for the firm to return 5.32p per share in 2028. That’s a 46% increase compared to 2025. But is that realistic?
Cyclicality
Analyst estimates for the next few years are pretty encouraging. If Lloyds achieves these, investors should be pretty pleased.
The trouble is, things can move quickly in the banking sector. And when they do, the effect on dividends can be dramatic. An obvious example is the pandemic. Analyst forecasts went out of the window when interest rates went to zero.
That was virtually impossible to predict. And while a repeat is (hopefully) unlikely, exogenous shocks do often come out of nowhere.
Right now, the market has plenty to focus on. The conflict in the Middle East and the rise of artificial intelligence (AI) are both threats. If either of these leads to a recession, this could force central banks to cut interest rates. And that would be bad for lenders.
That’s why I’m wary of dividend forecasts for Lloyds in any given year. They can change suddenly and without warning. Fortunately, I don’t think this matters much in the grand scheme of things. The uncertainty is inevitable, but investors can work around it.
Long-term investing
The way to approach Lloyds as an investor isn’t in terms of returns in any particular year. It’s over longer periods – 10 years or more. During that time, there will almost certainly be one or two disrupted years. But predicting when those will be is virtually impossible.
The way to work around this is to try to make sure there are enough good years to offset any bad ones. And that means taking a long-term view.
Owning Lloyd shares for a couple of years is risky. Those might be the recession years, which will mean a bad return for investors. The equation changes though, with a 10-year view. Disappointing years will happen, but their effect should be diluted by stronger ones.
Investors also need to think about buying at prices that offer some protection from unforeseen shocks. But that isn’t obviously right now.
A 4% dividend yield doesn’t offer investors much of a margin of safety. Especially compared with what else is available in the market. If the dividend gets cut in a bad year – which I think is likely – I expect the price to fall. And that’s the time to look at buying.
Dividend forecasts
When it comes to cyclical stocks like Lloyds, I’m a bit wary of dividend forecasts. Things can change for the worse quickly and without warning.
There are two things investors can do to deal with this. One is to take a long-term view to reduce the overall impact of disappointing years. The other is to buy when prices offer a margin of safety against downturns. And chances to do this do tend to come around.
Given where the stock is right now, I’m looking to focus on other opportunities. But I’ll be waiting and ready when the time comes.
