The Lloyds Banking Group (LSE:LLOY) share price is up an impressive 65% over the past year. It has long been a favourite for UK investors, due to the fact that it has a strong correlation to the broader UK economy. It’s also a well-known household name, which is something investors find appealing. Yet with the strong share price performance recently, can it head further this year? I think so.
The first reason I like Lloyds shares at the moment is due to the potential for good dividend income in the future. The total dividend that has been paid/is due to be paid is 1.24p. This gives a dividend yield of around 2.6% at the moment. The FTSE 100 average dividend yield sits above 3%, so it’s currently below the average.
However, I think that this yield is likely to head higher in the future. This is because the bank are only just starting to resume dividend payments. During the pandemic, the regulator (PRA) asked banks to halt dividend payments to protect the balance sheet. Lloyds obeyed, meaning that I wouldn’t have seen value in the Lloyds share price during 2020 as an income investor.
This guidance has now been removed, meaning that banks are free to start paying out income again. So my thinking here is that the Lloyds share price could head higher in the future, as more people buy shares for income.
Positive half-year results
Secondly, recent half-year results give me optimism for the Lloyds share price. The bank are clearing looking to pursue new business, with the expectation to exceed the £10bn first time buyer lending commitment for this year. The move towards a more digital bank is also progressing, with digital clients increasing by 5% since the start of the year.
As for other finances, net income was up 8% versus H2 2020. Growth in customer deposits was also seen. This shows me that clients are comfortable holding balances with Lloyds. The bank also generates revenue from holding deposits. The net interest margin reflects the difference between the rates paid on deposits versus those charged on lending. The difference is how the bank makes money.
Reward but also risks for the Lloyds share price
Finally, I think the Lloyds share price could do well due to the broader UK economy. I mentioned earlier that the bank tends to perform well when the economy does. Most of the customers (retail and corporate) are based in the UK, so there is a direct correlation here. If GDP continues to rise and unemployment continues to fall from the levels seen at the peak of the pandemic, Lloyds should indirectly benefit here.
Clearly, the risk here is that if the Delta variant or some other form of mutation causes another lockdown, this could materially hamper the Lloyds share price. Another risk is the fact that Lloyds are concentrated on the UK market. Other banks such as HSBC and Barclays have more rounded international exposure.