After Lloyds Banking Group (LSE:LLOY) reinstated the dividend in 2021, it started to attract investors looking for passive income. With a current dividend yield of 4.34%, Lloyds shares have remained popular over the past few years. If an investor had bought the stock for this purpose, here’s the return they would have achieved.

Running through the numbers

If an investor had put £2k in Lloyds stock at the beginning of March 2023, they would have been able to become shareholders ahead of the ex-dividend date in April 2023. The first dividend, 1.6p per share, would have been received in May. Since then, three other dividends would have been paid out, with the next one due in May.

Based on historical charts, an investor would have likely received a purchase price of 51.6p at open on 3 March. This means that 3,875 shares would have been bought, with some small change left over. The total dividends paid in the two years amount to 5.42p per share. This means £210.03 would have been paid out in the form of passive income. I’ve assumed that the dividends were spent when received instead of being reinvested.

Aside from just the income received, it’s important to note the unrealised gain or loss from the share price movements over this period. It currently trades at 72.3p, translating to a 39% gain! Of course, this isn’t a profit until the investment is sold. But it’s certainly a healthy number that contributes to the overall picture.

The picture going forward

The bank has been able to boost dividend payments over the past two years as it has benefitted from the rise in interest rates. Not only the rise, but the subsequent delay in interest rates falling again has provided an unexpected boost. The longer the base rate stays high, the longer the bank can enjoy a high net interest margin. This means Lloyds can make a larger margin between the rate it charges on loans and what it has to pay out on deposits.

The high cash flow this has provided has been a factor in the dividend payments increasing. Looking forward, the picture is less certain. However, with a dividend cover of 2.2, it’s clear that earnings are more than covering the dividend payments right now (anything above 1 is a good sign).

The main risk I see is if the UK economy falls into a recession later this year. Not only could interest rates be slashed, but loan defaults could increase, and transaction spending could dry up. This could negatively influence the management team’s ability to keep dividend payments growing.

Overall, an investment two years back from an income investor would have done well. Not only has the dividend grown during this period, but share price appreciation has also provided a double whammy. I feel new investors can still consider this as a dividend option going forward.