The Lloyds (LSE: LLOY) share price has fallen by 10% over the last year. This slump gives Lloyds shares a forecast dividend yield of 5.5% for 2022.
I’ve been taking a look at the latest City forecasts for the Lloyds dividend. Here, I’ll explain why I think the current share price slump could give me an opportunity to profit from an income growth technique used by Warren Buffett.
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What’s the forecast?
I’ll start with a warning. Dividends are not guaranteed and can be cut.
Although Lloyds has a reputation as a dividend stock, its ability to pay dividends can be affected by economic conditions. For example, the bank’s dividend was cut in 2020 when the pandemic struck. It’s still below 2019 levels today.
Despite this risk, my experience is that larger companies generally benefit from more reliable City forecasts. With a market cap of £28bn, Lloyds certainly falls into this category.
I’ve listed the latest consensus dividend forecasts I can find for Lloyds in the table below. In the right-hand column, I’ve calculated the dividend yield each payout would provide at a share price of 42p.
| Year | Forecast dividend | Dividend yield |
| 2022 | 2.3p | 5.5% |
| 2023 | 2.6p | 6.2% |
| 2024 | 2.8p | 6.7% |
Why I’m tempted by Lloyds’ dividend
Using the table above, I can see that if I bought Lloyds shares today at 42p, I could expect to receive a dividend yield of 5.5% this year.
If Lloyds’ dividend rises as City analysts expect, the dividend yield on my 42p cost price could rise to 6.7% in 2024. This would give me an income that’s nearly double the current FTSE 100 yield of 3.8%.
Lloyds’ dividend payout should be covered nearly three times by forecast earnings in 2022. This suggests to me that even if the bank’s profits dip over the next 18 months, the dividend should be fairly safe.
On balance, I think that Lloyds’ forecast dividend growth makes the shares an attractive buy at current levels.
I think Buffett might like Lloyds
A rising dividend yield on cost can be a great way to build wealth and generate an inflation-beating passive income. For this reason, my main focus as a dividend investor is to find companies that can deliver reliable dividend growth.
I don’t take any credit for this method. I was inspired to follow this path by billionaire Warren Buffett’s investment in Coca-Cola.
Buffett bought his Coke shares in 1988. At that time, they had a dividend yield of 2.5%. However, dividend growth since then means that Buffett’s shares now have a yield on cost of more than 50%. This means Buffett doubles his original investment with dividends alone every two years.
The Oracle of Omaha doesn’t usually invest in UK stocks. But if he did, I think there’s a good chance he’d be tempted by Lloyds’ solid finances and attractive yield.
I’m also tempted. Lloyds shares look attractive to me at current levels. I may add them to my dividend portfolio over the coming weeks.
This post was originally published on Motley Fool
