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Lloyd’s (LSE: LLOY) Stocks make up an important part of my passive income portfolio. I plan to buy more this year, as higher interest rates continue to support the banking group’s net interest margin.
With enough spare cash, here’s how to invest £5,000 in Lloyds to target £200 in annual dividend payments.
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Lloyds share price hasn’t moved anywhere in the past 12 months. But when dividends are included, the shareholders have earned a positive return. Moreover, the share price started 2023 on a positive note, up 9% since the beginning of January.
At present, the bank’s yield is 4.16%, which is higher than the average for FTSE 100 index by 3.6%.
If I had £5,000 to invest, I could buy 9,758 shares at today’s price of 51.24p. Unfortunately, I don’t have enough spare cash to invest this amount in one go. However, I already own some Lloyds shares and reinvest the profits I make to work towards that goal.
According to today’s return, an investment of £5,000 would generate £208 of annual passive income. Citi analysts expect the dividend yield to rise to 5.9% this year, which could mean that a £5,000 stake in the bank at today’s share price could generate more dividend income.
However, dividends are not guaranteed. I will be keeping a close eye on any guidance on shareholder payments in fourth quarter results due next week.
Outlook for Lloyds stock
Facing double-digit inflation, the Bank of England is widely expected to continue raising the base rate this year. This is good news for Lloyds’ share price, as the dark horse bank’s net interest income and net interest margin benefit from higher borrowing costs. Evidence of positive effects can already be seen in recent results for the third quarter.
A cooling housing market is a risk that Lloyds may have to take on as the UK’s largest mortgage lender. The bleakest forecasts are for a 40% crash in 2023, which would be devastating. The banking group is a little more optimistic, forecasting a drop of 8%, or possibly as much as 18% in a worst-case scenario.
However, I think the loan book looks resilient enough to survive the downturn. For example, 96% of bank mortgages are less than 80% LTV. In addition, the average household income for Lloyds mortgage clients is around £75,000 per annum.
The group also looks well-capitalized. Lloyd’s CET1 is a healthy 15%, which is above its target of 12.5%. The price-earnings ratio of 8.45 is another attractive feature in my view. This indicates an investment opportunity of value at today’s share price.
My passive income portfolio
I think 2023 could be a good year for bank stocks. Lloyds looks to me the best of the Footsie group, thanks to its market-leading dividend yield.
It also has less investment banking exposure than its competitors Barclays And HSBC. I think that’s a positive in a year that’s likely to be lacking in new mergers and IPOs.
I will continue to invest in Lloyds stock throughout the year to build passive income streams.
