Lloyds‘ (LSE: LLOY) shares currently sport a high yield. The dividend forecast for 2025 is 3.41p per share, which translates to a yield of around 6.4% at today’s share price of 53p.
I’m not tempted by this juicy yield however. Here’s why.
I’m seeking high returns
I’m very selective when it comes to investing in individual companies. I only choose high-quality businesses I believe will provide me with market-beating total returns (share price gains plus dividends) over the long run.
Given that global index funds tend to return around 10% a year on average over the long term, I’m looking for stocks that have the potential to deliver returns that are higher than that. And I’m not convinced that Lloyds has the potential to do that over the next five to 10 years.
Lack of share price action
Sure, the 6.4% dividend yield could get me a decent chunk of the return I’m looking for (I say ‘could’ because dividends are never guaranteed). I don’t have a lot of confidence in the share price side of the equation though.
Looking at the stock chart, Lloyds’ share price has gone backwards over both five and 10 years. That’s worrying.
Of course, there’s always a chance the share price performance could pick up in the future. After all, they look cheap at the moment on a price-to-earnings (P/E) ratio of a little under eight.
But what’s the catalyst going to be? Lloyds shares are generally seen as a proxy for the UK economy as it’s a domestically-focused bank. And the economy isn’t exactly firing on all cylinders right now. Currently, economists at Goldman Sachs forecast GDP growth of just 1.2% next year. That’s very low.
There are also risks that could send the share price lower. One is the Financial Conduct Authority’s (FCA) investigation into motor finance mis-selling. Analysts at RBC reckon that Lloyds could be looking at a bill of £2.5bn, or £3.9bn in a worst-case scenario, as a result of this investigation. This could have a negative impact on profits and the share price.
Overall, I don’t see Lloyds’ shares generating high total returns in the coming years despite the fact that they look cheap and have a decent yield. So I’m not planning to buy them.
Shares I’m looking at for 2025
There are a lot of UK dividend stocks that do tempt me right now however. One is HSBC. It’s also cheap and offers a high yield (7.6%). The key difference for me however, is that this bank’s far more globally focussed.
I’m also tempted by shares in pharmaceutical company AstraZeneca. They’ve taken a big hit recently and its directors have been buying millions worth of stock.
I’ll point out that I haven’t decided whether I will go ahead and buy these stocks. Right now, they’re still on my watchlist. But I’m considering them for 2025. To me, these stocks have far more investment appeal than Lloyds.
The post Why the 2025 dividend forecast for Lloyds shares doesn’t tempt me appeared first on The Motley Fool UK.
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Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has recommended AstraZeneca Plc, HSBC Holdings, and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
