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Lloyds Banking Group (LSE: LLOY) stock remains extremely popular with income investors in the UK. That’s not surprising, considering the group has more than 20m customers and a presence in nearly every community. It also owns Halifax, which makes it the UK’s biggest mortgage lender.
However, it’s no secret that the Lloyds share price has struggled long term. In fact, it’s down by 44% over the last decade. That said, there have been periods when investing in the stock would have proved a lucrative move.
With the wonderful benefit of hindsight, one such opportune moment arrived three years ago.
Suspended dividend
Back then, in August 2020, the world was in the grip of the pandemic and the vaccine roll-out was still months away. The FTSE 100 had tanked and, at 28p, the Lloyds share price was over 40% lower than the previous summer.
A few months before, in April, Lloyds had announced it would not be paying any dividends in 2020, following pressure from regulators. However, it quickly reinstated the dividend the following year, albeit at a far lower rate than before.
So, how much passive income would I now be receiving from my hypothetical £5,000 investment made three years ago?
Passive income
Firstly, that amount would have bought me around 17,850 shares. And with the Lloyds share price, currently at 42p, those would be worth 50% more than I’d paid back then.
Plus, I’d also be receiving £500 in dividends from my shares this year. Better still, analysts are expecting Lloyds to pay a dividend of 3.14p per share in 2024. That means I could expect my annual passive income to increase to £560.
For 2025, the payout could rise to 3.40p per share, for a dividend yield of 8%. If that forecast proves accurate, which isn’t guaranteed, the dividend would then be above its pre-pandemic level of 3.26p per share.
My theoretical passive income would then rise to £607. On my original investment of £5k, that would amount to a fantastic yearly income return of 12%.
How safe is this income?
Three years ago, the Bank of England lowered the base rate to almost 0% to help the economy survive the pandemic. Today, interest rates are at 5.25%, the highest level since the 2008 financial crash. As inflation falls, many experts now think rates will peak at around 5.75% next year.
While higher interest rates boost the profits of banks, the economy could be tipped into a recession if rates go too high. In that scenario, Lloyds would expect to see a sharp rise in loan defaults.
Therefore, it’s hard to foretell which direction the bank‘s profits and share price will head over the next couple of years. But the rebasing of the dividend in 2020 has certainly made the payout more sustainable. There’s now a margin of safety here, I feel.
Unfortunately, I didn’t buy Lloyds shares three years ago. But I did consider investing in April this year in the midst of the US banking crisis. Instead, I went with Standard Chartered due to its more attractive international focus.
The next time there’s a major sell-off in Lloyds shares, though, I might just invest.
