I discussed to somebody just lately that you can get 5% this 12 months in dividends from Lloyds Banking Group (LSE: LLOY) shares. He replied: “Meh, 5% is not any good to me.“

It may not sound quite a bit if we expect the inventory market is for getting wealthy fast in a single day. However it acquired me fascinated about how a lot that form of dividend return may add up to.

I have to stress that dividends aren’t assured, and even that 5% is simply the forecast for this 12 months. One thing may nonetheless go unsuitable to cease us getting it.

FTSE 100 dividends

However over the long run, the FTSE 100 has been returning round 3.5% to 4% in dividends, which incorporates the companies that solely pay low ones. And the way a lot distinction that may make will be actually astonishing.

The FTSE 100 has risen by 21% previously decade. However by my calculations, reinvested dividends would have taken whole returns to round 65%. Contemplating the so-called misplaced decade we’ve had for shares, I believe that’s fairly good.

Lloyds dividends

Let’s get again to Lloyds. Now, the previous decade has been a catastrophe for its share price, down a painful 25%. And dividends, at finest, have introduced whole returns near break-even.

On the brilliant aspect, that’s left us with a low valuation. Lloyds shares are on a forecast price-to-earnings (P/E) ratio of underneath 10. And it will drop to solely seven by 2026, if forecasts are proper.

To place that into perspective, it’s solely about half the long-term FTSE 100 common.

What sort of share price and dividend returns ought to we estimate so we will work out what the following decade may deliver?

Valuation

Analysts anticipate earnings to develop within the coming years. From 2024 to 2026, they forecast an increase in earnings per share (EPS) of 39%. And so they’re already predicting a 25% hike within the dividend over the identical two years.

Let’s guess that the P/E will keep at 10 (which I believe would nonetheless be low-cost), that would want the share price to rise to 80p by 2026. After which guess at a mean 3% per 12 months for the remainder of the last decade.

Utilizing these newest forecasts, we may see the Lloyds share price at 101p by the top of 2034, for a 77% price achieve.

Now let’s say the dividend yield averages out at 5% per 12 months for the last decade. By my sums, that would take our whole returns up to round 125% in 10 years. Even with the short-term share price enhance that I hope for, dividends may nonetheless make a critical distinction.

Beware

Lloyds faces a really unsure financial decade. And I believe that provides danger to each the share price and the dividend. Any financial shock may shake both. Simply have a look at the final decade.

And although I hope my guess will probably be lifelike, I could be approach out. However that is actually just a few ‘what if’ guesswork, and positively not a prediction.