I mentioned to someone recently that you could get 5% this year in dividends from Lloyds Banking Group (LSE: LLOY) shares. He replied: “Meh, 5% is no good to me.“

It might not sound a lot if we think the stock market is for getting rich quick overnight. But it got me thinking about how much that kind of dividend return could add up to.

I must stress that dividends aren’t guaranteed, and even that 5% is just the forecast for this year. Something could still go wrong to stop us getting it.

FTSE 100 dividends

But over the long term, the FTSE 100 has been returning around 3.5% to 4% in dividends, which includes the firms that only pay low ones. And how much difference that can make can be truly astonishing.

The FTSE 100 has risen by 21% in the past decade. But by my calculations, reinvested dividends would have taken total returns to around 65%. Considering the so-called lost decade we’ve had for shares, I think that’s pretty good.

Lloyds dividends

Let’s get back to Lloyds. Now, the past decade has been a disaster for its share price, down a painful 25%. And dividends, at best, have brought total returns close to break-even.

On the bright side, that’s left us with a low valuation. Lloyds shares are on a forecast price-to-earnings (P/E) ratio of under 10. And it would drop to only seven by 2026, if forecasts are right.

To put that into perspective, it’s only about half the long-term FTSE 100 average.

What kind of share price and dividend returns should we estimate so we can work out what the next decade might bring?

Valuation

Analysts expect earnings to grow in the coming years. From 2024 to 2026, they forecast a rise in earnings per share (EPS) of 39%. And they’re already predicting a 25% hike in the dividend over the same two years.

Let’s guess that the P/E will stay at 10 (which I think would still be cheap), that would need the share price to rise to 80p by 2026. And then guess at an average 3% per year for the rest of the decade.

Using these latest forecasts, we could see the Lloyds share price at 101p by the end of 2034, for a 77% price gain.

Now let’s say the dividend yield averages out at 5% per year for the decade. By my sums, that could take our total returns up to around 125% in 10 years. Even with the short-term share price boost that I hope for, dividends could still make a serious difference.

Beware

Lloyds faces a very uncertain economic decade. And I think that adds risk to both the share price and the dividend. Any economic shock could shake either. Just look at the last decade.

And though I hope my guess will be realistic, I might be way out. But this is really just some ‘what if’ guesswork, and definitely not a prediction.