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Want to retire before 65? Here’s how Lloyds’ high yield could help

Peter Stephens

Lloyds (LSE: LLOY) may not seem like an obvious stock for dividend investors to buy. The company has experienced a challenging period over the last decade, and it could be argued that it has not yet returned to full health. After all, trading conditions remain tough in a world where interest rates are at a low level.

However looking ahead, the company could offer income investing appeal. Its high yield and dividend growth potential could make it worth buying alongside another FTSE 100 dividend stock that released upbeat results on Wednesday.

Improving outlook

While the risks associated with Brexit remain in place, the prospects for the UK banking industry may be improving. There are expected to be multiple interest rate hikes over the next few years, and they could create more profitable trading conditions for the industry. Banks may be able to deliver higher net interest margins, and this could translate into higher profitability and rising dividends.

Lloyds, of course, has adopted a relatively generous position when it comes to dividend payments in recent years. The company has paid out a higher proportion of its profit as a dividend than many of its sector peers, with its stronger balance sheet and higher efficiency suggesting that it is in a better position to do so than many of its rivals.

Looking ahead, the stock’s current dividend yield of 5.4% is expected to improve over the medium term. Next year, dividends are forecast to rise by 7.7%. And with the prospect of higher earnings from stronger trading conditions, the stock could become a more enticing income play.

Given the growth potential from reinvesting dividends, the Lloyds share price could therefore become increasingly attractive for long-term investors with an eye on retirement.

Promising outlook

Also offering upbeat dividend prospects is prime housebuilder Berkeley (LSE: BKG). The company reported full-year results on Wednesday which showed that it was able to increase pre-tax profit from £812.4m in 2017 to £934.9m in 2018. That’s an increase of over 15% and shows that while the operating environment in London remains challenging, the company has been able to deliver results which are an improvement on the prior year.

With Berkeley continuing to move ahead with its shareholder return plans, it continues to offer income investing appeal. So far, it has returned £9.34 per share since the start of the programme. There is a further £2 per share due to be returned per year until 2021. This could work out as an annual dividend yield of 5.1% depending on the mix between dividends and share repurchases.

Beyond 2021, further shareholder returns are likely to be generous. The company’s dividend cover remains high at around 1.8 times. As a result, now could be a good time to buy the stock while it has a strong balance sheet and relatively sound profit potential.

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Peter Stephens owns shares of Berkeley Group Holdings and Lloyds Banking Group. 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.