The Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) share price has a forward dividend yield of around 6% at the moment. This uses next year’s forecast dividends of 3.6p per share, and suggests that the stock could have income investing appeal at first glance. After all, its yield is around 200 basis points higher than that of the FTSE 100.
However, the bank faces an uncertain near-term outlook in my view. The UK economy’s forecast growth rate has been downgraded in recent months by the IMF, with Brexit-related uncertainty set to remain in place over the coming months in my opinion.
As a result of the bank’s considerable exposure to the UK, I feel that it may be impacted to some degree by the weakening economic outlook for the country. Although its recent updates have suggested that it has not yet been affected by Brexit, I believe that weak consumer and business confidence may cause the operating environment for UK-focused shares to come under a degree of pressure.
In the long run, though, I remain optimistic about the dividend growth potential for Lloyds. The company is putting in place what I feel is a sound business model that could lead to rising profitability in the coming years. It is investing heavily in digital opportunities which could strengthen customer satisfaction at a time when consumers are demanding greater mobile offerings from their bank.
Further, a switch from branch to mobile may help the bank to become increasingly efficient. This could boost its profitability over the long run and may help it to afford a higher dividend.
Therefore, while the Lloyds share price outlook may be relatively uncertain at the moment, I’m optimistic about its ability to pay a higher dividend in future years. As a result, I feel it could have income investing potential, but may be riskier than some of its FTSE 100 index peers.