Shares in Lloyds (LSE: LLOY) (NYSE: LYG.US) have been held back in 2014 by weak sentiment. Certainly, the bank continues to make encouraging progress, with its disposal strategy allowing the company to return to profitability this year, but uncertainty surrounding the Scottish referendum and fines at rival banks have dampened sentiment in the stock and in the wider banking sector.
As a result, shares in Lloyds have fallen by 5% since the start of the year. However, due to its superb income prospects, that could all be about to change for the better. Here’s how.
A Return To Dividends
As mentioned, Lloyds’ strategy of disposing of non-core assets has been largely successful. Evidence of this can be seen in the fact that Lloyds is due to return to profitability this year for the first time since the start of the credit crunch. As a result, it is forecast to make its first dividend payments in over five years, which is great news for shareholders and shows that the bank is moving in the right direction.
Growth Potential
Lloyds is set to follow up a return to profitability in the current year with strong growth next year. Indeed, the bank’s bottom line is expected to increase by 7% in 2015, which would be a solid result and means that the bank has the scope to increase dividends at a brisk pace.
The real potential, though, is with regard to Lloyds’ dividend payout ratio. That’s because, while dividends are due to recommence this year, Lloyds is only set to pay out a small proportion of earnings as a dividend. Based on market forecasts, Lloyds’ dividend payout ratio is expected to be just 16% in the current year, which is extremely low.
However, the bank is targeting a payout ratio of 65% in 2016. That may seem like a huge jump, but such a level should be sustainable in the long term. The UK economy continues to improve and, as such, Lloyds is seeing increased demand for new loans and reduced write downs for bad loans. The result is a more stable income statement and this affords the bank the flexibility to pay out a greater proportion of profit as a dividend moving forward.
Looking Ahead
So, while Lloyds yields just 1.7% right now, it is forecast to yield 4.2% next year. With earnings and the payout ratio set to grow considerably by 2016, a 5%+ yield (at the current share price) could be very realistic over the next couple of years. As such, Lloyds could become your ‘must-have’ income stock a lot quicker than you think.