If I invest £10,000 in Lloyds shares, how much passive income will I make?

British flag, Big Ben, Houses of Parliament and British flag composition

The London Stock Exchange is home to hundreds of passive income-generating dividend shares. They offer a wide range of dividend yields, but Lloyds Banking Group (LSE:LLOY) is currently paying out more than 6%, which is notably ahead of the stock market average of around 4%.

Considering the bank lies at the heart of the British economy, that’s not too surprising. And it understandably commands a lot of popularity among UK investors. So how much passive income can investors generate with a £10,000 investment today? And is it actually a business worth owning for the long run? Let’s explore.

Volatile but rising dividend

Being primarily a retail bank, Lloyds makes its profits on the difference between the interest paid to depositors and interest received from borrowers. Over the last decade or so, margins have been pretty tight. That’s not too surprising, given inflation was low, resulting in equally low rates set by the Bank of England.

However, despite this, the group has successfully paid a dividend to shareholders since 2014. It hasn’t been a continuous upward trend, thanks in part to the 2020 pandemic. But the yield has consistently proven generous. And, as previously mentioned, it currently sits at 6.1%.

Therefore, if I were to buy £10,000 worth of Lloyds shares today, I’d end up with a passive income of £610 a year, or roughly £50 a month. That’s certainly not a terrific sum. But providing the group’s earnings continue to grow, this payout could improve significantly in the future.

Looking at analyst forecasts, the average consensus shows that the dividend per share will rise to 2.76p after its final 2023 fiscal year payout. And subsequently, climb to 3.15p the following year.

Obviously, forecasts need to be taken with a pinch of salt since they’re based on assumptions that may not come to pass. However, if this 3.15p figure’s correct, then by the end of 2024, the yield could reach 7.6% – or a £760 passive income. And should this upward trend continue, things may only get better from here.

Is dividend growth likely?

UK interest rates look like they will remain elevated throughout 2024 for longer than previously anticipated. Until inflation is back under control, rate cuts aren’t likely to emerge. That’s good news for Lloyds since it enables the bank to profit from a wider spread for longer.

However, with plans already in motion to cut rates and stimulate new sustainable economic growth, the gravy train may come to an end in 2025 onwards. Management has proven its ability to adapt to a lower interest rate environment. So there doesn’t appear to be any thesis-breaking threats on the horizon. But whether the group can maintain dividend growth is another question altogether.

Ultimately, it seems Lloyds’ ability to bolster margins is highly dependent on factors beyond its direct control. I think it’s highly unlikely for the bank to disappear anytime soon. But with other FTSE dividend-paying businesses not so dependent on external factors, investors may be better off considering an investment elsewhere for passive income. At least, that’s what I think.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc. 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.