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. Heres 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.
Lloyds is set to follow up a return to profitability in the current year with strong growth next year. Indeed, the banks 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. Thats 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.
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.
Of course, Lloyds isn’t the only bank with huge income potential. So, which others should you buy, and why?
A great place to start is a free and without obligation guide from The Motley Fool called A Clear And Actionable Guide To The UK Banks.
The guide is simple, straightforward and you don’t need to be a banking expert to put it to good use! It could boost your portfolio returns and make 2014 and beyond an even more prosperous period for your investments.
Click here to access your copy of the guide – it’s completely free and comes without any further obligation.
Peter Stephens owns shares in Lloyds Banking Group.