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I mentioned to someone recently that you can get 5% this year on dividends Lloyds Banking Group (LSE: LLOY) shares. He replied: “Meh, 5% is not good for me.“
It may not sound like much if we think that the stock market is all about get-rich-quick overnight. But it got me thinking about what this kind of dividend return might entail.
I must emphasize that dividends are not guaranteed, and even that 5% is only that prediction this year. Something could still go wrong to stop us.
FTSE 100 shares
But over time, the FTSE 100 has been returning about 3.5% to 4% in dividends, including only low-paying firms. And how much of a difference it can make can be truly amazing.
The FTSE 100 is up 21% over the past decade. But by my calculations, the reinvested shares would have taken a total return of around 65%. Considering the so-called lost decade we've had with dividends, I think that's pretty good.
Lloyds shares
Let's go back to Lloyds. Now, the last decade has been a disaster for its share price, which has fallen by a miserable 25%. And the benefits, at best, brought a full return close to the breakup.
On the bright side, that leaves us with a lower price. Lloyds shares are at a forecast price-to-earnings (P/E) ratio of less than 10. And they will drop to just seven by 2026, if forecasts are correct.
To put that in perspective, it's about half of the FTSE 100's long-term average.
What kind of dividend and dividend yield should we estimate in order to figure out what the next decade might bring?
Measurement
Analysts expect earnings to grow in the coming years. From 2024 to 2026, they forecast an increase in earnings per share (EPS) of 39%. And they are already predicting a 25% dividend increase over the same two years.
Let's assume the P/E will remain at 10 (which I think will still be cheap), that would require the share price to rise to 80p by 2026. Then assume an average of 3% per year for the rest of the decade. .
Using these latest forecasts, we can see Lloyds' share price at 101p by the end of 2034, with a price gain of 77%.
Now let's say the dividend yield comes out at 5% per year for ten years. By my calculations, that would take our total return to about 125% over 10 years. Even with the short-term price increase I hope for, the benefits can still make a big difference.
Be careful
Lloyds is facing a very uncertain economic decade. And I think that adds risk to both the share price and the dividend. Any economic shock can shake things up too. Just look at the last decade.
And while I hope my predictions come true, I may be out. But this is just a 'what if' guess, and not a prediction.
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