I’d invest £5,000 in Lloyds shares for £200 in passive income a year

Lloyds Shares (LSE:LLOY) are an important part of any passive income portfolio. I plan to buy more this year, as rising interest rates continue to support banking groups’ net interest margins.

With enough cash to spare, here’s how I invested £5,000 in Lloyds to target £200 in annual dividend payments.

The highest dividend stocks

The history of the share price of Lloyds Limited in US Dollar is in the table every year. But when dividends are included shareholders have received a positive return. What’s more, the share price has started 2023 on a positive note, rocketing 9% since the beginning of January.

Currently, the bank is yielding 4.16%, which is higher than the average FTSE 100 shares at 3.6%.

If I had £5,000 to invest, I could buy 9,758 shares at the current price of 51.24p. Unfortunately, I don’t have enough money to invest that amount. However, I already own some Lloyds shares and I am reinvesting the dividends I receive to achieve this target.

In today’s results, an investment of £5,000 will generate £208 in annual passive income. City analysts predict the dividend yield could rise to 5.9% this year, which could mean £5,000 worth of shares in the bank at the current share price could yield even bigger profits.

That being said, dividends are not guaranteed. I will be keeping an eye on guidance on shareholder payouts in Q4 results due to be released next week.

Lloyds share price changes

Facing double inflation, the Bank of England is expected to keep raising its base rate this year. This is good news for the Lloyds share price, because net interest income is a black horse bank and net interest income has benefited from rising borrowing costs. Evidence of the positive effect can already be seen in the latest results for Q3.

A cooling housing market is a risk Lloyds has to take as the UK’s biggest mortgage lender. The bleakest predictions put a 40% crash in 2023, which would be devastating. Banking groups are somewhat sanguine, expecting an 8% fall, or perhaps 18% in the worst-case scenario.

Even so, I think the loan books seem resilient enough to survive. For example, 96% of bank mortgages are below 80% LTV. Additionally, the average household income for Lloyds mortgage customers is around £75k per annum.

The group also looks well capitalized. Lloyds’ CET1 ratio is a healthy 15%, which exceeds the target of 12.5%. The price-to-earnings ratio of 8.45 is another attractive feature in my view. This indicates a value investment opportunity at the current share price.

My passive income portfolio

I think 2023 could be a good year for banking stocks. Lloyds looks like the best of the Footsie bunch to me, thanks to its market-leading dividend yield.

It is also less exposed to investment banking than its competitors Barclays and HSBC. I see this as a positive in a year that will lack new mergers and IPOs.

I will continue to invest in Lloyds shares throughout the year to build a passive income stream.