My first investment in Lloyds Banking Group (LSE: LLOY) was a few years ago, now. And it’s fair to say it hasn’t been the most successful of my career. The Lloyds share price has fallen more than 50% since my initial purchase, which sounds like a disaster.
But apart from a pandemic interruption, dividends have kept my investment above water. Only just, but it’s not the wipeout that the price chart might suggest.
Generating income
I eventually want to to take a stream of income from my shares. Until then, I intend to make further regular investments. And that reminds me of billionaire investor Warren Buffett’s analogy about eating burgers.
People who eat burgers will surely be happier if beef prices fall. But investors who plan to keep buying shares tend to cheer price rises instead. That doesn’t make sense. As a net buyer of Lloyds shares, a share price fall should put me in a better long-term position.
A lower price means I can buy more shares for the same money. And hopefully that will get me more long-term income than if the price rises.
Long-term target
How much could I aim for if I bought Lloyds shares at today’s price, and carried on for another 10 years? With the Lloyds share price depressed, we’re looking at a forecast dividend yield of 5% this year. And analysts see that rising to 6% by 2024. Forecasts are often wrong, but I think there’s a good chance of seeing an average of 6% over the next decade (based on today’s share price).
Suppose I invest just £100 per month in Lloyds shares, and keep doing that for the next 10 years. And I reinvest all my dividends in more Lloyds shares. In 10 years time, my shareholding would have grown to a little over £16,000. And if I stopped then, I’d be able to take £110 in income every month.
If I could invest as much as £500 per month, I could end up taking £550 per month in income. So to approximate, every monthly £100 I invest in Lloyds shares over a 10-year period could then generate about the same in income every month… for ever.
Reality
This is all based on a Lloyds share price of 41p at the time of writing. And on that price not changing, with the dividend yield remaining fixed at 6%.
Those are not realistic assumptions. I expect Lloyds shares will rise in price and the dividend yield will fall. If that happens, my monthly investments will get me fewer shares in future years, and I’ll get a lower percentage dividend return on them.
And that shows why Buffett’s burger thing is so true. The longer the Lloyds share price remains low, the better I should do in my pursuit of eventual income.
Caution
I’m not advocating buying Lloyds shares specifically, and I haven’t looked at the risks — of Lloyds, or of bank shares in general. And this is just an illustration of what these sample figures might produce.
But I think it does help show how buying dividend shares can generate long-term income. And how low share prices are the long-term investor’s friend.