The yield on the Lloyds (LSE: LLOY) share price has jumped to 5.1%. There are two reasons why the yield has risen to this level.
First of all, shares in the lender have been under pressure recently as investors have been moving away from risk assets as geopolitical tensions have flared up.
The yield on the company’s shares has also increased after it announced that it would be hiking its distribution to investors for the year following its full-year earnings release.
Lloyds share price dividend growth
Two weeks ago, the company reported a pre-tax profit of £6.9bn for its 2021 financial year. Off the back of this result, the lender announced that it would repurchase £2bn of shares and hike its final dividend to 1.33p.
To put this figure into perspective, for its 2020 financial year as a whole, Lloyds paid total dividends of just 0.6p.
City analysts expect the bank to increase its payout further in the years ahead. Analysts have pencilled in a dividend of 2.5p per share for the 2022 financial year, and 2.7 p per share for 2023.
Based on these projections, shares in the bank could yield 5.6% next year. Of course, these numbers are subject to change. In the past, the bank has issued special dividends to supplement regular payouts.
Unfortunately, at the beginning of 2020, it was also forced to eliminate its dividend. This is a major risk investors have to deal with when buying income stocks. The payout is never guaranteed.
Still, I think the Lloyds share price looks too good to pass up with this dividend on offer. Not only is the lender benefiting from rising profitability, but it also has a relatively strong balance sheet.
This is the reason why management has been able to return additional cash to investors by repurchasing shares. The company has enough cash to chase other growth initiatives and return even more money to investors.
Risks ahead
That said, with pressures such as the cost of living crisis, rising interest rates and the supply chain crisis all weighing on UK economic activity, the lender’s growth could fail to live up to expectations in the months and years ahead. I will be keeping an eye on these challenges as we advance.
Despite these potential risks, I think the Lloyds share price has enormous potential as an income investment. As the economy returns to growth after the pandemic, I think the bank can capitalise on this recovery.
It is also set to benefit from other growth initiatives, such as its push into wealth management and buy-to-let property. These initiatives are unlikely to provide the sort of profits the core business generates. Still, they may offer some much-needed diversification in an increasingly uncertain environment.
As such, considering the lender’s growth potential and its current dividend yield, I would buy the stock for my portfolio today.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.
