Global dividend payouts reached a record high during the first quarter (Q1) of 2026, according to data released by investment manager Vanguard.

Investors received a total of $421 billion during Q1, up 6.7% from $394 billion during the same period the previous year.

Reliable dividend payers are often among the most popular stocks for DIY investors, particularly those who want to generate an income from their investments.

Most of the growth in global dividend payments came from developed markets.

Dividend payments in Europe (excluding the UK) increased 34% to $68 billion. Dividend payments in North America rose by 9% to $205 billion.

“Nearly half of global dividend distributions came from North America. Dividends also increased in the UK, Japan and the Pacific region,” said Viktor Nossek, head of investment and product strategic intelligence at Vanguard Europe.

While Europe and North America saw dividend payouts increase by a combined $27 billion, China and emerging markets had a net negative effect on global dividend growth.

China’s financial sector in particular registered a $10 billion decline in payouts, though Nossek highlighted that this does not reflect weaker fundamentals but is the result of a timing effect.

“The four largest banks switched to semi‑annual dividends and paid their interim dividends for the first half of 2025 as early as December 2025,” said Nossek. “This brought payouts forward into the 2025 calendar year, leaving only limited distributions in the first quarter of 2026.”

Which sectors saw the highest global dividend growth?

In the US, the sector that contributed most to global dividend growth was financials; the sector paid out $45 billion in total dividends – up $8.3 billion from the previous year and thereby accounting for 31% of global dividend growth.

This increase was largely thanks to US banks successfully completing stress tests from the Federal Reserve.

“In Europe excluding the UK, growth was heavily concentrated in the healthcare sector,” said Nossek. “A small number of pharmaceutical companies accounted for most of the increase, driven by higher annual March dividends against a backdrop of solid fundamentals.”

Healthcare accounted for $7 billion of the total $17 billion increase in European dividend payments.

How to invest in global dividend stocks

If you are considering where to invest and are hoping to harness the power of dividends, then investing in Europe could be a worthwhile strategy.

Nossek expects Europe to continue to be a good region for dividend seekers in the current quarter given the “structurally strong dividend season in April and May”.

“Energy and materials stocks could once again become key drivers later in 2026, provided high commodity prices persist,” he added.

If you want to tap into regional or dividend stocks, there are a number of funds, exchange-traded funds (ETFs) and investment trusts that could give targeted access.

For passive exposure to global dividend stocks, Vanguard’s FTSE All-World High Dividend Yield UCITS ETF (LON:VHYL) tracks the FTSE All-World High Dividend Yield Index and holds stocks like JPMorgan Chase (NYSE:JPM) and Johnson & Johnson (NYSE:JNJ).

Murray International Trust (LON:MYI) offers global equity dividend exposure via an active strategy, and is a ‘dividend hero’ (meaning it has increased its dividend payments every year for more than 20 years).

ETFs offering exposure to dividend stocks in specific regional markets include WisdomTree Europe Equity Income UCITS ETF (LON:EEI) or iShares MSCI USA Quality Dividend Advanced UCITS ETF (LON:HDIQ).

UK dividends rose by more than a fifth in the first quarter to £16.4 billion kicking off a strong start to the year for income investors, despite short-term uncertainty caused by the conflict in the Middle East.

Higher-than-projected numbers were reported for both regular and one-off special dividends during the first three months of 2026, according to investment administration business Computershare’s latest dividend monitor report.

First-quarter payouts were at their highest level since 2021, largely due to sizeable one-off payments, although regular dividends were also ahead of projections – up by 1.1% on a constant currency basis, rising to £13.2 billion. Median company dividend growth was 2.8%.

Mark Cleland, CEO issuer services, UK, Channel Islands, Ireland & Africa at Computershare, said the economic fallout from the Middle East conflict represents a significant shock but the implications for income investors remains to be seen.

He said: “The Middle East conflict is likely to place pressure on profits across a number of sectors, reducing the cash available for dividend payouts.”

Cleland explained it takes time for such pressure to present itself in dividends because they are only declared once company results are finalised and profits are reported.

He added companies tend to protect dividends in the short term by cutting buybacks or increasing borrowing, as dividend cuts send a negative signal to the market.

Special dividends dominated payouts in Q1

Investors received a ninefold increase in special dividends in Q1 compared with the same period last year, to £3.3 billion.

Consumer goods giant Reckitt Benckiser (LON:RKT) accounted for roughly half of that amount as it distributed the proceeds following the sale of Essential Home to a private equity buyer.

Similarly, telecommunications services business Zegona Communications (LON:ZEG) paid out £1.2 billion to shareholders following the disposal of its Spanish fibre network joint ventures.

Retailer Next (LON:NXT) was the third major special dividend payer, distributing £441 million following higher-than-expected sales, strong online performance and a land sale worth £54 million.

Computershare said beyond the contribution of extraordinary payments, a weaker pound also played a part in the numbers beating its projections, resulting in higher-value dollar payments.

What sectors paid the highest dividends?

At sector level, most categories performed better or in line with Computershare’s projections, with airlines, leisure and travel dominating, including cruise operator Carnival (LON:CCL), which paid its first dividend since the pandemic.

The two largest-paying sectors – healthcare and oil – reported 3% and 4% declines on last year’s Q1 numbers, respectively.

Both categories raised their per-share dividends in US dollar terms but as the pound weakened during the quarter, it held back the amounts actually returned to shareholders.

In spite of the geopolitical tensions and subsequent movements in the oil price, the outlook for the energy sector remains unclear.

In the oil and gas sector, low recent profits, small dividend increases and ongoing share buybacks all held back levels of cash returned to investors.

Such uncertainty can also lead to winners. Oil producers had seen lower profits as energy prices fell, leading to stagnating dividend growth and BP (LON:BP.) suspending its share buyback scheme to shore up its balance sheet. But now oil and gas prices are rising, energy producers will see their revenues rise faster than their costs in the near term.

Similar inflationary effects followed in food, beverages and tobacco.

Healthcare was the biggest distributor in the first quarter – contributing a quarter of Q1 total dividends. Pharmaceutical company AstraZeneca (LON:AZN) remained the top payer during the period for the fifth consecutive year but total payouts dipped due to those currency effects.

A broadly positive picture in housebuilding and consumer goods and services was hampered by Berkeley Group’s (LON:BKY) decision to cancel its dividend, citing tough trading conditions.

A stalwart for income seekers, utilities were a key positive contributor, in part due to companies like National Grid (LON:NG.) and SSE (LON:SSE) issuing “significant” numbers of new shares to fund major investments, increasing the size of their equity base.

The report said: “It might appear paradoxical to simultaneously raise new equity and pay a dividend but the point of continuing to remunerate shareholders is to signal confidence in the future.

“Utility investors are often very income-focused so maintaining the dividend is important to such companies.”

Both companies offered scrip dividends, where shareholders can choose to receive shares instead of cash, which helps companies manage cash levels.

Mid-caps, miners and banks all faring well for 2026

Elsewhere, the report also highlighted the higher growth rate of dividends from mid-sized companies compared to their larger counterparts.

Companies in the FTSE 250 index posted underlying dividend growth of 5.9% in the first quarter, far surpassing the 0.9% growth rate of the top 100 blue-chip names.

With UK equities projected to yield 3.5% over the next 12 months, up from 3.3% in January, the report said second quarter dividends were already shaping up favourably and ahead of Computershare’s January forecast.

It said miners were benefiting from rising commodity prices even before the war began, with payouts finally recovering after several weak years.

Banks are also pushing up their dividend increases beyond expectations.

As a result, Computershare is upgrading its forecast to £91.6 billion headline payments in 2026, including special dividends – an increase of 5.3% year on year. In January it had this predicted at 1.5%.

Underlying growth projections have also improved, expecting regular payouts of £86.7 billion – up 3.1% year on year, versus the earlier projection of 2%.

Cleland added: “Overall, 2026 dividends are currently tracking ahead of our January forecast after a solid first quarter and a positive outlook for Q2.

“Based on current information, the second half looks a little softer than initially expected, but not enough to offset a strong first half.”

Investors in UK dividend stocks got £14.3 billion in payouts in the final quarter of 2025, a rise of 1.3% on the previous quarter.

Regular dividends, which excludes one-off extraordinary payments, rose to £13.9 billion in Q4 2025, marking a positive end to the year, new data from Computershare’s dividend monitor report shows.

The fourth quarter of 2025 beat Computershare’s projections as regular dividends were more resilient than expected, especially in the energy, consumer basics and property sectors.

Meanwhile, a surge in special dividends helped boost the quarter’s figures, coming in £360 million higher than expected. A weaker pound in October and November also meant dividends paid in US dollars were converted into pounds more favourably.

Despite a strong Q4, UK dividends fell overall in 2025 by 0.9% to £87.5 billion, bringing the median annual dividend growth rate to 3.7%, down from 4.6% from 2024. This being said, 2025’s full year figures were better than Computershare's prediction of £87.2 billion.

Dividend growth in 2025 was also much slower than average rates before the pandemic, only just beating inflation.

Mark Cleland, CEO of issuer services in the UK at Computershare, said: “Dividend payouts have still not regained pre-pandemic highs, and the slow dividend growth we’ve seen since 2020 largely continued last year.

“Rates did improve as 2025 progressed – and might well have been higher although many companies used significant sums of capital to undertake share buyback programmes.”

Share buybacks continue to eat into dividend growth

Last year continued the recent trend of investors seeing slower dividend growth as firms instead diverted cash into share buybacks.

While full figures will not be available until March, Computershare estimates that firms spent around £63.6 billion through share buyback schemes 2025, more than double the total spent in 2019.

Buybacks in 2025 were worth 73p for every £1 in dividends, compared to just 30p in 2019.

The prevalence of buyback schemes has reduced annual dividend growth by three percentage points on average since 2019, says Computershare.

If the cash used for share buybacks had paid out as dividends instead, 2025 would have seen £120 billion distributed among investors instead of the comparatively paltry £87.5 billion.

Which sectors saw the strongest dividend growth?

By far the strongest sector for dividend growth in 2025 was the industrial goods and support sector. Underlying dividends growth in the sector was up 23.9% on the year.

This was thanks mainly to Rolls-Royce making record payouts to its shareholders of £890 million after a four year absence.

A large increase in dividends paid by BAE systems also helped push up the sector’s dividend growth thanks to a strong year in the aerospace and defence markets.

Meanwhile, banks, insurers and general financials increased regular dividends by £1.2 billion across the three sectors.

Healthcare, utilities and basic consumer goods also made a notable positive contribution. The homebuilding and consumer sectors saw reduced dividends, with notably less paid out by house builder Bellway and designer brand Burberry.

Will 2026 be a good year for dividend investors?

This year is projected to see investors paid total dividends of around £88.8 billion, up 1.5% on a headline basis, according to forecasts by Computershare.

Regular dividends of £85.9 billion are anticipated to rise 2.0% on a constant-currency basis, with UK equities yielding 3.3%.

Computershare projects that dividends from the mining sector are likely to slow in 2026 or potentially even stop altogether. Banks are also expected to continue delivering modest growth, while energy dividends are expected to be flat.

The negative impact of share buybacks on dividend growth is also expected to continue in 2026.

Cleland added: “There are no clear indications that dividends will grow much faster in 2026, but a median dividend growth of 3.7% suggests a healthier market trend than the outlying figures suggest.”

“The true investor… will do better if he forgets about the stock market and pays attention to his dividend returns.” – Benjamin Graham

Dividend income has always been one of the key contributors to equity-market returns, especially in periods of volatility or bear markets. In the 1970s and 2000s, both periods of significant market volatility for the S&P 500, virtually all of the index’s returns came from income, according to data compiled by Bloomberg and Guinness Global Investors. In the 1970s, the index recorded growth of 76.9%, with 17.2 points coming from price appreciation and 59.7 from dividend income. In the 2000s, the index fell by 24.1%, but dividends added 15 points for a total return of -9.1%.

The longer one stays invested, the more critical dividends become. Guinness Global’s data, going back to 1940, reveal that, over rolling one-year periods, the total contribution from dividend income to total return was just 27%, but that number grew to 57% over a rolling 20-year period. They also reveal that $100 invested at the end of 1940, with dividends reinvested, would have been worth approximately $525,000 at the end of 2019, versus $30,000 with dividends paid out. In this period, dividends and dividend reinvestments accounted for 94% of the index’s total return.

The same trend has been observed in the UK. Between 1 January 2000 and 31 December 2019, the FTSE 100 delivered an average annual return of just 0.4%. However, if you include dividends, the index has actually returned 122% over the same period (or 4% a year), according to Schroders’ calculations.

Headwinds for dividend stocks during the pandemic

Still, there’s a reason the figures presented only go up until 2019. Since the pandemic, this relationship has broken down. The latest data from S&P Global show that, since 1926, dividends have contributed about 31% of the total return for the S&P 500, while capital appreciation has contributed 69%. That’s mostly down to the performance of the past five years.

Since the end of 2021, dividend stocks, as defined by the S&P 500 Dividend Aristocrats index – S&P 500 constituents that have followed a policy of increasing dividends every year for at least 25 consecutive years – have produced a total return of just 9% a year compared with 15.6% for the broader S&P 500 index. This decade, dividends have added just 12% to the S&P 500’s total return, the lowest contribution on record, says Hartford Funds.

As Ian Lance, co-manager at the Redwheel and Temple Bar Investment Trust, notes, equity returns have been “driven by a positive re-rating of equities, particularly in the US and particularly in technology stocks”. Dividend stocks were also hit disproportionately hard in the pandemic years. During 2020, $220 billion of dividends were either cut or paused, according to Janus Henderson.

Research by Goldman Sachs found that more than 80% of US dividend exchange-traded funds (ETFs) underperformed the S&P 500 during the 2020 equity drawdown period, and half of them did not bounce back as strongly as the index in the subsequent recovery.

Dividend stocks also “tend not to perform well when interest rates rise”, as Alan Ray, investment trust research analyst at Kepler Partners, notes. “Investors drawn to conservatively managed dividend-paying companies when interest rates were close to zero now find they can buy ‘risk-free’ UK gilts with yields of 4% or 5%, or even just keep cash in a savings account,” says Ray.

When to trust the dividend yield

Despite the headwinds for dividend stocks over the past five years, history shows they can be a safe haven in periods of volatility and uncertainty. What’s more, many income stocks are now trading at relatively undemanding valuations compared with their growth peers, suggesting there’s a bigger margin of safety with these equities in the event of a market downturn.

There’s no official definition of what makes a good income stock, but there’s one thing most of the research on the topic agrees on, and that’s a correlation between yield and quality, or rather the lack of it. While a dividend stock with a high yield might seem attractive as an income play, more often than not the yield is a reflection of traders’ doubt about the sustainability of the payout.

As Martin Connaghan, co-manager of Murray International Trust, notes, “there is no point in being drawn in by a high dividend yield… because that yield is most likely unsustainable and hence false. Stocks that have, on the face of it, very high yields can be vicious value traps if dividends are subsequently cut.”

In fact, research shows that, rather than chasing high yields, investors should instead look to companies offering yields around the 2% to 4% mark. Yield itself should not be used as a gauge of quality. The best way of evaluating the sustainability and quality of a dividend payout is to analyse the quality of cash flows. In business, cash is king. Cash flow gives a good indication of management’s approach to capital allocation.

As Imran Sattar, portfolio manager of the Edinburgh Investment Trust, notes, “For stocks with higher yields it is important to understand the sustainability of that dividend, how much the dividend is covered by earnings and free cash flow, or ongoing capital generation in the case of a bank… and also to think about whether there is anything on the horizon that could change the cash-flow dynamics such as an increased need for investment.”

This view is echoed by Connaghan, who says, “The ability to sustain and grow dividends is essential. Companies with a high cash-conversion ratio, dividend cover and free cash-flow yield should be in a much stronger position to do this.”

Free cash flow is generally defined as the cash flow generated by operations, excluding the costs of running the business and capital expenditures. In a traditional capital allocation framework, if a firm has free cash to spend, it should first reinvest it back into its operations if it can achieve an attractive and sustainable return on investment. If this opportunity is not available, the company should use the money to reduce debt, and if it has no debt, return the money to investors.

Cash flow figures give us a real, unabridged version of what management is doing with a company’s funds. Investors often turn to earnings before interest, tax, depreciation and amortisation (Ebitda) as a proxy for cash flow, as that’s the metric companies usually like to present. However, this ignores essential business costs, such as the replacement of capital equipment, interest on debt and taxes.

Similarly, a simple dividend cover calculation, which generally takes earnings per share divided by the dividend per share, also provides a misleading picture. Earnings per share do not account for all capital expenditure, particularly on long-term assets, which can be extremely costly for capital-intensive companies. When a company pays a dividend, the money leaves the business. That means the capital must be truly surplus to requirements to prevent problems emerging at a later date.

History is littered with companies that have paid out too much during the good times and have struggled with weak balance sheets and a lack of shareholder support in the bad.

The best dividend stocks

The best dividend stocks are those in companies that strike a balance between operational costs, including capital expenditures, and prudent balance-sheet management, along with sensible dividend policies. And they avoid the damaging concept of a “progressive dividend policy”. Progressive policies envisage the dividend rising steadily year after year. They are designed to provide security for investors. In fact, they do the opposite.

Companies always have and always will go through cycles, and making a commitment to increase a dividend year after year, no matter what, forces management into wrong decisions. It’s difficult to cut a dividend when such a policy is in place, which often puts firms in difficult positions, having to pay out more than they can afford.

Some of the most sensible dividend policies are based on small regular payouts, with annual special dividends based on profit throughout the year. This gives more flexibility, allowing management to announce additional distributions as needed without putting undue stress on the balance sheet. Managers can also choose to alternate between dividends and share buybacks, the latter being easier to turn on and off depending on the business environment.

FTSE 100 insurance giant Admiral is an excellent example. Car insurance can be a volatile and unpredictable business. It moves between a hard market when insurance prices are rising and profits are plentiful and a soft market where competition intensifies, prices fall and insurers have to stomach big losses. Managing a business through this cycle requires financial flexibility and a strong balance sheet, so Admiral cannot afford to commit itself to an unsustainable dividend policy. Instead, it commits to distribute 65% of its post-tax profits annually as a regular dividend, supplementing these distributions with special payouts.

For example, for the first half of the year, Admiral declared a regular dividend of 85.9p per share and a special dividend of 29.1p per share, for a total distribution of 115p, or 88% of post-tax profit. This was a pretty hefty interim distribution for the group. In 2021, a bumper year following the pandemic, which forced a change in driving habits and a substantial reduction in accidents, the company’s annual dividend payout reached just under 280p per share. However, in the following years, as drivers returned to the road and started crashing into each other, the company reduced its distribution in line with falling profits. For the 2023 financial year, it paid out just 103p across both its interim and final dividends.

Another example is CME Group. It pays a regular quarterly dividend, equivalent to a yield of about 2% per year. It supplements this with a special distribution at the end of the year based on annual trading performance. Last year, for example, the company paid out four regular dividends of $1.15 per share and one final special dividend for the year of $5.25.

The perils of a regular dividend policy became all too clear in the mining sector back in 2016. That year, commodity prices slumped as China’s previously meteoric growth started to splutter to a halt, leaving mining giants such as BHP, Rio Tinto, Glencore and Anglo American in a difficult position. Not only had these companies made a commitment to hefty, regular, progressive dividends based on past profitability, they had also spent and borrowed heavily to fund growth.

As commodity prices and revenue plunged, something had to give. BHP cut its interim dividend by 75%, the first cut since 1988, and abandoned its progressive dividend policy. Rio also slashed its dividend in half and Glencore was forced into a messy restructuring involving a $2.5 billion cash call, as well as a dividend cut.

In another example, BT had to cut its dividend in 2020 when management realised the company needed to spend more on its fibre build-out to keep up with the competition. This was a big blow for income investors as prior to the cut BT was often touted as one of the UK market’s top income plays.

Where to hunt for dividend income

Sensible capital allocation is a good indicator of dividend quality, as is the overall quality of the business. Quality can be defined in many different ways. Warren Buffett summed it up quite well in his letter to shareholders of Berkshire Hathaway in 1996: “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, 10 and 20 years from now.”

To put it another way, a quality company is one that has a strong competitive advantage and a long runway for growth. A strong competitive advantage also typically translates into higher-than-average profit margins, providing the company with ample cash to invest in marketing, growth and debt repayment, and to return funds to shareholders.

James Harries, co-manager at STS Global Income & Growth Trust, says the best income stocks are “predictable, resilient, high-quality businesses” you can “say something sensible about on a five-,seven- and 10-year view”. That often means sticking with the companies that he describes as “steady as she goes” – they often “grow slower, but [grow] more persistently”.

A great example of the strategy, and a recent addition to the portfolio, is Nike. “It’s the highest quality global sports brand,” notes Harries, and though the company is going through some turbulence, “I’m pretty confident that we’re buying a really high-quality asset at a very attractive valuation”. Nike is one of the best-known and valuable consumer brands in the world, boasts a gross profit margin of more than 40%, and has billions of dollars in net cash on the balance sheet. It’s also rewarding shareholders, with $591 million in dividends in the first half of 2026 and $18 billion returned via share buybacks since June 2022.

The utilities sector can also be a good place to hunt for income. “Often a utility company operates in a regulated sector that is supported by a long-term concession contract, which will stipulate the return that can be generated over the life of the concession,” notes Jacqueline Broers, co-portfolio manager at Utilico Emerging Markets. As a result, cash flows can be more “resilient” and “predictable” than those of other sectors. “All of which translates into a more sustainable long-term dividend payout.”

Broers highlights the example of IndiGrid Infrastructure Trust, which owns 41 power projects comprising 17 operational transmission projects, three greenfield transmission projects, 19 solar generation projects, and battery energy storage (BESS) projects located across 20 states and two union territories in India. The average remaining contract life on the company’s transmission assets is just under 26 years, with contracted revenues underpinning the company’s dividend yield of about 10%.

The other advantage utilities tend to have is the prohibitive replacement cost of their assets. Take UK-based National Grid, which owns the majority of the UK’s high-voltage transmission network, comprising thousands of miles of cables and transmission stations. Building these assets from the ground up would be virtually impossible today, not to mention the vast cost. That gives the company a robust competitive advantage.

Utilities aren’t the only companies that can have such an edge. Connaghan points to the likes of Grupo ASUR, a Mexican-listed airport operator with 16 assets across Central and Latin America. “Its key asset is Cancun airport and the company has seen its passenger numbers increase by a compound annual growth rate of 6% over the last 35 years,” he says. “Such was the financial strength of this business in the earlier part of this year that in April, they announced two 15-peso special dividends in addition to a regular dividend of 50 pesos. This put the stock on a 14% dividend yield.”

The fund manager also highlights the likes of Enbridge, a Canadian pipeline business which transports and stores natural gas and oil through its network, which spans North America. The company has grown its dividend for 30 years in a row. “This type of business is far less exposed to the underlying shifts in the commodity prices themselves, as 98% of its Ebitda comes from assets backed by either regulated returns or take or pay agreements,” he notes.

Investment trusts for dividend income

The structure of an investment trust lends itself to income investing. Not only do they give investors access to a well-diversified portfolio of income stocks, but they can also pay dividends out of both capital and income, unlike ETFs and other open-ended investments. That means trusts are more likely to be able to sustain their dividends in periods of market volatility. Trusts with a global mandate also have far more flexibility in where they can invest so they can pick the best income, quality and growth plays in the world.

JP Morgan Global Growth and Income (LSE: JGGI), Murray International (LSE: MYI), Scottish American (LSE: SAIN) and STS Global Income & Growth (LSE: STS) all have a global mandate. Ecofin Global Utilities and Infrastructure (LSE: EGL) has a global mandate within its utility sector. Others, such as Law Debenture (LSE: LWDB) and Temple Bar (LSE: TMPL), have a UK focus, but with some international holdings.

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The combined market capitalisation of the Magnificent Seven group of US mega-cap stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – is now over $22 trillion, meaning these seven stocks make up about 37% of the S&P 500 and 23% of the MSCI World index. As a result, most investors are likely to be heavily invested in this handful of tech giants, which has worked well for the past five years. However, with the market looking increasingly frothy, it could be time to take some money off the table.

Mega-cap tech has sucked up capital at the expense of other businesses, meaning there are now some exciting opportunities appearing in corners of the market. STS Global Income & Growth Trust (LSE: STS) is one way to invest in these kinds of cheaper stocks and reduce exposure to more frothy areas of the market.

STS Global Income & Growth offers quality income

STS holds a fairly concentrated portfolio of between 28 and 34 names, selected for their predictability, resilience, quality and income potential. The strategy emphasises firms that have scope for persistent earnings and dividend growth, which should result in reduced volatility, say James Harries and Tomasz Boniek of Troy Asset Management, who have run it since early 2020. The same duo also run the Troy Global Income Strategy with a similar mandate, which has delivered an annualised volatility of 9.1% since its launch in 2016, compared with 11.2% for the MSCI World index.

The top holdings today are British American Tobacco (BATS) and CME Group. BATS offers the “unusual combination” of a high-quality business trading at an attractive valuation, says Harries. CME, the operator of the world’s largest futures and options exchange, is a high-quality firm that offers a 4% yield comprised of regular and special dividends. More recently, the managers have added Nike, purchasing it at a low point when it was “out of favour” due to strategic missteps and tariff trouble. The shares had fallen 71% from peak to trough, making it a classic quality value play.

The trust has a 33% weighting to the UK, an opportunistic allocation as “global investors have shunned the UK”. However, on a look-through, only 6% of sales come from this market. “So we’re not making a call on the UK economy at all, what we are doing is saying that we’re taking advantage of attractively valued global assets listed in the UK.”

STS Global Income & Growth: avoiding technology

Technology is just 10% of the portfolio – a conscious decision, as most tech companies don’t pay a dividend. However, the result is that STS has underperformed the market in recent years, with a net asset value (NAV) return of 36.3% versus 49.3% for its benchmark, the Lipper Equity Global Income index. Yet while the rest of the market is starting to look pricy, STS’s portfolio is anything but expensive. At the end of October, the trust’s holdings were trading at an average price-to-earnings (p/e) ratio of 18 compared with an average of 21 for the MSCI World. The estimated yield was 3% compared with the market’s 2%.

What’s more, Harries and Boniek have been able to fill the portfolio with quality names at low prices. The portfolio has an overall operating margin of 28% (compared with 14% for the market) and a return on capital of 16% (compared with 9% for the market). Quality names in the portfolio trading close to or at the bottom of the ten-year p/e range include the likes of Reckitt, Novartis, Roche, Unilever, Nestlé and Accenture.

Buying at “lower valuations means less volatility”, says Harries. With so many high-quality companies currently “out of favour for whatever reason”, the team has been able to “build asymmetry into the portfolio”. This means aiming for “limited downside and long-term decent upside”.

In a market that’s starting to look overexcited and overextended, STS offers an alternative for investors seeking quality, value and income. The trust is currently trading at a small discount to NAV and offers a dividend yield of around 3.5%.

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Investors in UK firms have been paid £1 billion less in dividends in the third quarter of 2025 compared to 12 months ago as big firms make cuts.

UK firms paid their investors a total of £24.6 billion in Q3 2025, down 1.4% from the £25.6 billion paid out in the same period last year, according to Computershare’s latest dividend monitor report.

The smaller payouts are due to a decline in special dividends. Cuts in special dividends from five of the UK’s top companies put a particularly large downward pressure on dividend growth, lowering it by 5.7 percentage points.

While dividend payouts have been under pressure for some time now, with regular dividends (which exclude special payments) down 0.6%, the Q3 fall in regular dividends was slightly better than the 0.9% drop forecast.

We look at the sectors that delivered the most and least.

The lowest paying sectors for dividends

The mining sector in particular was to blame for the drop in overall payments - dividend reductions at Rio Tinto, Glencore, and Anglo American cut payouts by £711m in Q3, equal to 2.9 percentage points off total Q3 growth.

Meanwhile, Vodafone halved its dividend, Burberry suspended payments, and Berkeley opted instead to use the cash for share buybacks.

This final reason is a significant factor in Q3’s slowing dividend growth. Computershare found around 160 companies currently have active share buyback programmes, with some being sizable. Shell and HSBC, the UK’s two largest dividend payers, bought back around 6% of their shares in the last year.

Shell spent around twice as much on share buybacks than it did on dividends in the last 12 months, according to Computershare – before the pandemic the opposite was true by a wide margin.

This being said, dividends are still seemingly in vogue in 17 of the 21 sectors analysed by Computershare, while 80% of UK companies either raised or maintained their payouts.

Across the wider market, median per-share dividend growth was a modest 3%, but there were some standout firms in the quarter.

Computershare singled out Rolls-Royce, which made the largest positive contribution to overall dividend growth for the second consecutive quarter, boosting Q3 payouts by 1.5 percentage points. No wonder it was one of the top stocks bought by retail investors in September.

In the banking sector, NatWest was also a standout after it raised its dividend by more than half following strong earnings growth. Lloyds also made a large increase.

Will investors get more from UK dividends next quarter?

Following poor dividend growth in Q3, investors may need to brace for another disappointing quarter as Computershare says its outlook for Q4 has worsened.

It now projects underlying dividend growth of 2.5% for the full year of 2025, down 30 basis points from Computershare’s projection just three months ago of 2.8%.

This is thanks to a greater drag from share buybacks, slower median dividends growth, and new cuts in the pipeline. If the projection is correct, the total regular dividend yield for 2025 would be £84.7 billion.

What is more, as one-off special dividends have been unusually rare this year, Computershare has lowered their Q4 forecast for them.

This means the firm only expects special dividends to total £2.5 billion in 2025, down £2.7 billion from the £5.2 billion in special dividends paid out in 2024.

Mark Cleland, chief executive of issuer services at Computershare, said: “We are seeing some further cuts for Q4, and little prospect of higher payouts from global multinationals like those in the oil sector.

“The combined effect of widely reported falls in business and consumer confidence, sticky inflation and high market interest rates also make for a challenging economic backdrop for domestically-focused companies.

“In addition, companies are diverting a lot of cash to share buybacks, and this is a significant factor slowing dividend growth – around 160 companies now have active programmes, and some are very sizable.

“All this adds up to a projected unusual second consecutive annual decline in dividends for 2025, leaving payouts a long way short of the pre-pandemic highs.”

Top dividend stocks to watch

Amid a weakening dividend atmosphere, there are still some stocks that UK investors can rely on for reliably good payouts. Chris Beauchamp, chief market analyst at IG, highlighted three dividend stocks for investors to watch.

HSBC

HSBC announced it would pay out 7.356p per share in dividends on 18 July.

Beauchamp said: “HSBC has rebuilt its reputation as a dependable income stock, steadily lifting dividends over the past five years. Strong profits and capital discipline mean payouts are well-covered, supported by stable earnings from Asia and the UK. Investors get a solid and sustainable income stream without excessive risk.”

Aviva:

Insurance firm Avia is also a dividend stock Beauchamp is keeping tabs on. The firm announced it would pay 13.1p per share in dividends on 9 January.

He said: “Aviva’s streamlined business and strong cash generation have powered consistent dividend growth. The insurer’s payouts are well-covered and backed by healthy capital reserves, offering a dependable and sustainable source of income among FTSE 350 peers.

Sainsbury’s:

Supermarket giant Sainsbury’s is Beauchamp’s final dividend stock to watch. This is thanks to its “steady dividend growth, supported by resilient trading and strong cash flow.”

He adds: “Its payout is well-covered and underpinned by efficiency gains and solid grocery demand, providing reliable income with scope for further growth.”

Sainsbury’s declared it would pay 9.7p per share in dividends on 17 April.

Few companies embody the resilience of British retail quite like Next (LSE: NXT). From a near-collapse in the 1980s to becoming a high-street staple, Next has navigated seismic shifts in consumer behaviour, technology and economic cycles with remarkable agility. Under the stewardship of CEO Simon Wolfson, the company has transformed from a struggling chain into a multi-channel powerhouse, blending physical stores, a pioneering online platform and a logistics network so efficient it’s become a lifeline for other retailers. Its relentless focus on innovation, clear communication with investors and disciplined capital allocation have delivered exceptional returns for shareholders, bucking the trend of declining high-street footfall. Today, the shares of Next aren’t obviously cheap, but its record and growth prospects make it hard to bet against. For investors seeking a business that marries retail heritage with forward-thinking strategy, Next remains a compelling proposition.

In 1988, Next was teetering on the brink, with a share price below 10p and debts mounting. Over-ambition and a failure to focus on core strengths had left the company vulnerable. The turnaround began in the early 1990s under chairman David Wolfson and CEO David Jones. Jones closed unprofitable stores, sold manufacturing facilities and offloaded the Grattan business. A 1993 strategy unified store and catalogue shopping ranges, strengthening the Next brand.

However, a misstep in 1998, of ordering trendy, pricey clothing while understocking basics, dented profits. This underscored the need for disciplined execution. Enter Simon Wolfson in 2001, aged just 33. The son of former chairman David Wolfson, his appointment raised eyebrows. Yet Wolfson’s tenure now spans more than two decades, and he has silenced doubters, delivering one of the most impressive success stories in UK retail.

Wolfson’s golden age as Next's CEO

Since Wolfson took the helm, Next’s share price has soared from around £8 to well over £100, a 12-fold increase. This is just part of the story. Next has also delivered an impressive dividend record, inclusive of occasional large special dividends. An investment in Next at the time of Simon Wolfson’s appointment 24 years ago would have increased in value by almost 30 times (including dividends), far outpacing that of the wider stock market. Wolfson’s leadership blends strategic vision with operational rigour. He prioritised consistency of the brand, cost control and customer satisfaction, ensuring Next’s clothing and homewares remained fashionable, high-quality and fairly priced. His candid, long-term approach to capital allocation has been a hallmark. Unlike peers constrained by legacy commitments, Wolfson views investments through the lens of incremental returns, unencumbered by institutional pressures. This flexibility has allowed Next to pivot swiftly, whether embracing e-commerce or weathering economic storms.

Next’s success stems from relentless investment in technology and improvement in processes, often yielding unexpected benefits. A prime example is Next’s use of individual barcodes for each item, initially introduced to streamline the returns process. Customers could return items quickly, boosting satisfaction and lowering staffing requirements and the wage bill. An unintended consequence was a sharp reduction in theft.

Thieves could no longer claim refunds on stolen goods, as barcodes tied each item to a specific purchase. This enhanced profitability without additional cost.

This knack for innovation extends to Next’s “omnichannel” strategy. The Next Directory, launched in 1988, gave the company a head start in mail-order retail, positioning it to embrace e-commerce seamlessly. By 2001, Next was the only major UK clothing retailer profiting from online sales, helped by its early adoption of technology allowing customers to order in store, while competitors such as Marks & Spencer lagged. The Directory’s infrastructure – warehouses, delivery networks and customer data – became the backbone of Next’s online platform. Today, online sales account for almost two-thirds of revenue, with physical stores contributing the remainder through more than 800 UK locations and more than 250 international franchises.

Next’s “bricks and clicks” model integrates physical and digital channels seamlessly. Stores double as return hubs, click-and-collect points and mini-warehouses for online orders, reducing delivery costs. This approach mitigates the high return rates (up to 30%) typical in online apparel by making returns convenient. Wolfson’s decision to embrace rather than suppress returns has built loyalty among customers, with stores facilitating efficient processing. The result is a defensible advantage over pure online rivals reliant on subsidised shipping.

While high-street footfall has plummeted – down 20% on a like-for-like basis since 2019 for many retailers – Next has bucked the trend. Its stores, strategically located and easy to access, drive impulse purchases, with browsers often buying more than planned. In 2024, Next reported full-year revenues of £6.1 billion, with online sales growing strongly and store sales holding steady. This resilience stems from Next’s ability to evolve. Since 2005, store sales have fallen from 77% to around a third, while digital sales have surged. Yet stores remain profitable, unlike many peers that have been forced to close locations en masse.

Next’s appeal lies in the strength of its brand and its adaptability. Its own-label clothing, complemented by third-party brands via the Label platform, offers choice and value. Homewares, now 21% of sales (up from 10% in 2005), have diversified revenue. Partnerships with brands such as Victoria’s Secret and Laura Ashley, plus a fashion start-up launched in 2025, keep the offering fresh. By maintaining quality and affordability, Next attracts a broad audience, from young families to professionals, defying the high-street malaise.

Next is Amazon for apparel

Next’s distribution prowess is a game-changer. Its logistics network, honed over decades, rivals Amazon’s in efficiency, making Next a “quasi-Amazon” for UK clothing retail. Investments in warehousing, IT and supply-chain management enable next-day delivery for 80% of online orders, with cut-offs as late as 10pm. This speed and reliability have drawn third-party retailers to Next’s Total platform, launched in 2020, which offers logistics, marketing and customer-credit services. Brands such as Reiss and JoJo Maman Bebe now piggyback on Next’s infrastructure.

This platform strategy transforms Next from a retailer into an operating system, leveraging its 458 UK stores, 267 international franchises and global websites. Overseas sales, particularly in Europe and the Middle East, grew by double digits in 2023, reflecting high returns on marketing investments. By opening its platform to rivals, Next has created a new revenue stream while reinforcing its logistical dominance, an advantage few competitors can match. As with so much else, Next is the innovator in this area, which gives it the edge on the potential for driving greater returns from investment in third-party distribution agreements.

Next’s stock market updates are a masterclass in transparency, offering investors rare insight into its operations. Wolfson’s annual reports and trading statements are candid, detailing not just financials but strategic priorities, risks and consumer trends. For example, in 2021 Wolfson forecasted a shift to online dominance, predicting store sales would stabilise at 29% of revenue, a projection that proved accurate. This clarity builds trust. When the Covid pandemic hit, Next assumed the greatest risk was demand, not supply, and acted swiftly to bolster liquidity. Recent updates highlight a “healthier-than-expected” consumer economy, driven by pent-up demand and savings, reinforcing Next’s optimistic outlook. Investors benefit from this foresight, making Next a favourite among analysts and fund managers.

Next’s approach to capital allocation balances growth and shareholder returns. Operating margins of 20% and returns on capital of 50%-60% generate substantial cash flow, funding both reinvestment and payouts. Since 2000, Next has returned billions to shareholders, with an ordinary dividend yield regularly bolstered by special dividends in strong years.

When the shares have been cheap, the company has proactively bought its own shares and cancelled them, providing a significant increase in value per share. Since Simon Wolfson’s appointment, the share count has fallen by two-thirds, increasing the value of each share threefold in the process. By reducing the share count, Next has boosted earnings per share, contributing to its 13-fold increase in earnings per share since Wolfson took over. Buybacks are paused during crises such as the one in 2020, but resume when cash flow stabilises, reflecting Wolfson’s pragmatism. Investments prioritise long-term returns over short-term gains.

Paying a premium for Next

Next is currently trading at a value premium to the market and its own history. This reflects Next’s quality, but raises questions about value. The stock isn’t cheap, yet it is a business that has consistently and demonstrably become more valuable over time, perhaps justifying this premium. Other companies with such a large national footprint as Next would be seen as mature, but Next keeps finding new ways of becoming a bigger and more profitable enterprise. It continues to leverage its technological and operational excellence to become an increasingly vital part of retail infrastructure to many companies selling in the UK.

Risks remain. A consumer slowdown could hit discretionary spending, although Next’s affordable pricing offers resilience. Infrastructure costs for digital growth and staffing expenses strain margins, although this sort of investment is arguably a crucial component of Next’s long-term success. Wolfson is still only in his 50s, but questions about succession are beginning to be raised and few would bet that a successor could replicate his tremendous success. Online competition, such as from Shein, threatens market share, although Next’s brand, quality and logistics do provide a buffer.

Next’s strengths outweigh these concerns. Analysts project continued real annual revenue growth, driven by online expansion, third-party partnerships and international markets. The company’s ability to innovate makes it a unique retail play in the UK.

It is run by perhaps one of the best CEOs, if not the best, in recent British corporate history, and has such strong fundamentals that even when the current CEO chooses to retire, it will surely remain one of the best companies in the UK. Next isn’t a bargain, but it’s hard to bet against a company that’s consistently outmanoeuvred competitors for three decades. In a world where high-street giants falter, Next continues to make big strides.

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The Lloyd’s of London insurance market is one of the City of London’s most interesting entities. Based at its iconic headquarters in the centre of the City, it’s often just referred to as Lloyd’s, and sits at the heart of the UK and indeed global insurance market. Lloyd’s isn’t an insurer itself. Instead, it’s an organisation that brings together all the parties in the market under one roof – the brokers, underwriters, capital providers and support staff. The Corporation of Lloyd’s regulates this market and its stakeholders.

Over the last five years, this market has become increasingly profitable. The prices paid by insurance buyers, known as premiums, have in some cases more than doubled. While losses from major events such as hurricanes have also increased dramatically, companies have tightened their standards, only writing business they expect to be profitable. As a result, the combined ratio of the Lloyd’s market has held comfortably below 90% (anything below 100% signals a profit, while anything above signals a loss). The combined ratio of Lloyd’s was 86.9% in 2024, up from 84% in 2023. It fell to 79.1% in the first quarter of 2025.

What’s interesting is that, to some extent, the market is still inefficient. Some of the unique policies written in the market (such as that covering Tom Jones’s chest hair) have no alternative market. That means underwriters can often earn super-normal profits.

How to gain exposure to Lloyd's of London

Throughout much of its history, the capital used to back insurance policies underwritten by Lloyd’s was provided by wealthy individuals known as Names. Over the past few decades, as the sums involved have grown, Names have largely been replaced by corporate entities – the likes of Beazley (LSE: BEZ) and Hiscox (LSE: HSX) – but a small percentage of capital (around 8%) is still provided by smaller investors, often via so-called Limited Liability Vehicles (LLVs).

In theory, anyone can invest directly into the market, although Lloyd’s used to recommend a minimum of £350,000, and investors are advised to deploy no more than 10% of their assets into the market. In practice, anything less than £1 million isn’t going to be worth the cost, ruling out all but the wealthiest investors.

But there are other options to invest directly in this unique and highly lucrative market. Beazley and Hiscox both have some exposure to Lloyd’s, and Aim-listed Helios Underwriting (LSE: HUW) owns a portfolio of LLVs, mostly acquired from former Names active in the market. It’s one of the only ways smaller investors can buy direct exposure to Lloyd’s business.

Another way to buy into Lloyd's of London

A private-market alternative is Talisman Underwriting. Initially set up in the 1990s as a private company to allow Names to move their Lloyd’s exposure into a limited company, the business underwrote £48 million of capacity on Lloyd’s syndicates in 2025 (syndicates are similar to individual companies, which pool capital and resources to underwrite more business and achieve economies of scale).

Today, the company is open to new investors who want to invest in Lloyd’s, but don’t have the funds or perhaps the time to invest directly. As David Monksfield, who became a director of Talisman at its inception in 1997 and is responsible for the day-to-day running of the company, explains, the firm has exposure to 14 Lloyd’s underwriting syndicates offering diversification across businesses that are not otherwise available. Unlike traditional ways to invest in the market, investors can “get involved buying shares for cash as [they would with] any other company, with each share priced on net asset value”. Income is also paid out annually as a dividend, circumventing the age-old three-year accounting cycle that has historically been a feature of the Lloyd’s of London market for individual investors.

Lloyd's of London profits

In the past few years, the company, just like the broader market, has experienced explosive growth. “The 2022 result is 12.4% of capacity, and the current forecast for 2023 is a mid-point of 16.9% of capacity,” says Monksfield, referring to the standard metric of profitability for Lloyd’s, a profit given as a percentage of total underwriting capacity written. This excludes the contribution from so-called Funds at Lloyd’s, the capital used to support underwriting activity. Talisman focuses on risk reduction above all else and, to that end, owns mainly cash with a percentage of the portfolio managed by Ruffer. “Talisman has a focus on the downside and does not want a volatile investment portfolio that could go down in value just at the wrong time,” says Monksfield.

When it comes to the firm’s portfolio of syndicates underwriting business in the Lloyd’s market, Talisman focuses on seven core holdings, which Monksfield says have “excellent management and underwriting skills”. “These are businesses that know how to manage the cycle and, through normal trading conditions, should provide profits throughout the cycle,” he adds. “We have no intention of changing the policy that we have and that has led Talisman to exceed the Lloyd’s market average performance for most of the years it has been in existence since 1998.”

Talisman pays its investors with dividends, twice a year, from any profit earned from underwriting activity. As shares in the limited company are also tradeable (although highly illiquid), investors can also profit from any potential upside generated from asset-value growth. If the shares are owned for two years, they qualify for inheritance-tax business relief. While the company is set up and designed to help individuals build exposure to the Lloyd’s market without having millions to invest, the minimum investment is set at £100,000, a significant sum, but substantially less than the millions required to enter Lloyd’s individually. Crucially, the limited company structure also provides investors with a layer of limited liability.

Talisman isn’t going to be suitable for most investors, but as a way to buy into Lloyd’s it’s an interesting option for those investors with sufficient capital and the desire to take on such an investment.

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Last year, Henderson European Focus Trust and Henderson EuroTrust merged to form Henderson European Trust (LSE: HET), with £680 million of assets (after significant cash exits) and a well-regarded management team in charge. Just a few months later, though, the co-managers left Janus Henderson, and the combined trust will now be merged into the larger Fidelity European Trust (LSE: FEV).

The three- and five-year investment records of FEV and HET are already very similar at 33% and 74%. This is behind JPMorgan European Growth & Income (LSE: JEGI), on 46% and 99% respectively, but ahead of the rest of the sector. The enlarged FEV, with £2.1 billion of assets, should now have better liquidity and will aim to maintain a mid single-digit discount to net asset value (NAV). Fees should be lower, and the dividend yield moderately higher.

On the negative side, an average holding size of nearly £50 million for the 45 holdings will severely limit the ability of FEV to invest in smaller companies. This has not been a problem in recent years, with smaller companies underperforming, but it could be in the future. Investors may want to hold a European smaller companies specialist trust as well.

Focus on growth

FEV looks for companies that produce improving dividend growth “as this indicates steady structural growth”. Their criteria include a good performance record, a good return on capital, the ability to generate cash and structural but not acyclical growth. This is summed up as “good quality at a reasonable price”. They dislike companies with high levels of borrowing.

The focus is on stockpicking rather than reading the macroeconomic or geopolitical tea leaves. “Although the outlook for continental Europe is uncertain and faces challenges, we are excited about the prospects for the individual companies in which we invest,” says co-manager Sam Morse. “European companies have often kept pace with global indices because they are less and less reliant on the domestic European economies – two-thirds of sales and profits now comes from outside Europe.”

Stocks are generally held for three to five years, with no holding over 4% of the portfolio. The largest holdings – SAP, Roche, ASML, Nestlé and L’Oréal – reflect a bias to growth, but banks, energy and basic materials are also well represented. These top five explain why FEV has fallen behind JEGI in the last year – ASML, Nestlé and L’Oréal had a miserable second half of 2024, falling 25% in value on average. Only Nestlé has had a respectable (but dwindling) recovery in 2025, rising 9%.

First-rate European funds

Both FEV and the smaller JEGI (£525 million of net assets) are first-rate funds trading on low discounts to NAV. JEGI has the higher dividend yield at 4% against 2.25% for FEV, supplementing its income with payments from capital. Exposure to smaller companies is via a holding of 2.5% in its sister trust, the £640 million European Discovery Trust (LSE: JEDT), whose performance has been revitalised in the past year by management changes.

JEDT’s largest rival in the sector has been the European Smaller Companies Trust (LSE: ESCT). This trust recently bought back 42% of its share capital following a hostile takeover attempt by Boaz Weinstein’s Saba Capital (which sold its 30% stake in the buyback), but is now regaining scale by absorbing the dismally performing European Assets Trust (LSE: EAT). This will take net assets back up to £780 million, providing better scale and liquidity and lower management costs. However, the decision to double the dividend yield to 5% by paying out of capital looks impetuous.

The European trust sector may be shrinking but in both the mainstream and smaller companies sector, investors still have the luxury of choice.

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Sometimes the best opportunities don’t come from firms in glamorous, fast-growing industries, but from well-run companies that have carved out a niche for themselves in lower-profile, but no less profitable, sectors. An example of this is food distribution, which involves making sure that food from producers, both ingredients and prepared meals, reaches wholesale customers such as restaurants, and large institutional consumers such as supermarkets and hospitals. In this industry, Sysco (NYSE: SYY) stands out from all the rest.

Since food distribution is a low-margin business, the key to success is keeping costs to an absolute minimum. Sysco’s status as the largest food-distribution company in the US, supplying nearly one in every five restaurants or commercial kitchens in the country, means that it can use economies of scale to do its work extremely efficiently. As a result, even though its operating margins are only around 3%-4%, it makes a 20% return on capital employed. The fact that the food-distribution industry rewards scale also serves as a barrier against any potential competition, helping to protect both market share and margins.

Should you invest in Sysco?

Sysco isn’t resting on its laurels. It has pursued a policy of international expansion and now operates in 90 countries. This enables it to reduce costs further when it comes to sourcing the cheapest food from around the world, and also allows it to continue growing by entering new markets. Furthermore, the company has acquired food-service companies in other countries, such as last year’s acquisition of Scottish meat and fish supplier Campbells Prime Meat. All this has made it the largest food-distribution company in countries ranging from Canada to the UK, as well as the third-largest producer in France.

Sysco has a solid growth record, with its international sales expanding by an average of 17% a year since 2021; overall earnings have jumped by around 50% since 2021. Adjusted earnings have quadrupled during the same period. Even if you use pre-Covid levels as the point of comparison, profits have still grown by a third since 2019. It has also managed to increase its dividend continuously during this period, one of the few companies in the industry to pay out money to shareholders. Despite this, it is still reasonably valued, trading at only 16.7 times estimated 2026 earnings and offering a dividend yield of 2.8%.

In spite of Sysco’s long record of growing both earnings and dividends, its share price has had a mixed record, fluctuating over the past few years. This might be about to change. The shares have built up momentum over the past few weeks as they are now trading above their 50-day and 200-day moving averages. I would therefore suggest that you go long at the current price of $78.41 at £40 per $1. In that case, I would put the stop loss at $54.41, which gives you a total downside of £960.

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Income has historically been one of the best-performing investment strategies. The average annualised return of dividend-paying stocks in the S&P 500 between 1973 and 2024 was 9.2%, compared with 4.3% for non-dividend-paying stocks, according to a study by Ned Davis Research. What’s more, dividend payers were less volatile and offered more protection during market downturns. In 2022, when the S&P 500 declined by more than 18%, dividend-paying stocks in the index fell by 11.1%, while non-dividend payers experienced a 38.7% loss. In the global financial crisis of 2007-2009, S&P 500 earnings per share plummeted by 92% while dividends fell by only 6%.

A wealth of other studies come to a similar conclusion. One explanation for this is superior financial health. Companies with the best dividend records tend to have robust balance sheets, strong profit margins and substantial economies of scale, as well as competitive advantages. Cash that isn’t distributed is reinvested, used to reduce debt or spent on buying back stock.

Avoid the income trap

However, investors need to be careful what lessons they take from this. Companies outperform not because they pay a dividend, but because they are financially responsible enough to maintain that dividend. Do not confuse yield with value or quality. A company that offers a high dividend yield is not necessarily cheap or a good business. In fact, the very highest-yielding stocks often underperform the market over time – their dividends are high because they are unsustainable. Some research suggests splitting the market into five groups by yield and focusing on the second-highest yielding group instead.

Income investors and fund managers chasing yield often fall into these kinds of traps. Active fund managers with an income mandate are particularly vulnerable, since they must keep pace with the rest of the industry.

The FTSE 100 currently yields roughly 4%, and many UK equity income managers will use this as a benchmark for their portfolio. That means they could be forced to deploy capital in stocks that are not necessarily of the best quality but offer the highest yields, in order to maintain the yield from their fund.

Balance income and growth

Instead of relying solely on the dividend yield, investors should consider funds that take into account the total shareholder return, also known as the total shareholder yield. Companies that return cash to shareholders through other methods – such as stock buybacks or debt repayment – have more flexibility than firms trying to chase fixed dividend targets.

Management can switch off buybacks at any point, and often pause paying down many types of debt if they wish. Reneging on dividend expectations is significantly more risky. There’s a lengthy list of CEOs who have had to step down after U-turning on a dividend commitment.

Investors should also look at growth. Dividends are powerful, but a company’s earnings growth ultimately dictates how much cash it can return to investors. A fund that focuses on growth rather than income could generate better long-term returns.

You can still draw a regular income from a fund that achieves strong capital gains by selling, say, 4% of your holding every year. Since the top rate of capital gains tax is currently 28%, compared with 39.4% for dividends, there may be a tax benefit to this approach as well, if your fund is held outside a tax wrapper such as an individual savings account (ISA).

JPMorgan Global Growth and Income (LSE: JGGI) is one such fund we like. Passive investors might look at an exchange-traded fund (ETF) such as Fidelity Global Quality Income ETF (LSE: FGQD).

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Dividend stocks are some of the most popular investments in the UK, particularly among those looking for regular income or liquidity in their portfolio. However, dividend growth has been slowing recently.

UK companies paid out £14 billion in dividends in the first quarter of 2025, a 4.6% drop compared to the same period a year ago. Reduced special dividends, often known as extra dividends, and cuts from three companies lowered the total. These included Vodafone, Burberry and Bellway Homes.

Despite this, the latest figures from stock transfer company Computershare paint a more positive picture than expected.

Underlying dividend growth, which excludes special dividends, only fell by 0.2%. This figure was 2.7 percentage points better than forecast. Computershare also pointed to “encouraging growth” from sectors like healthcare, food, industrials and leisure.

Healthcare companies were some of the biggest dividend payers in the first quarter, with pharmaceutical giants AstraZeneca and GlaxoSmithKline increasing their dividends by 6.6% and 7.1% respectively.

The largest negative contribution came from the telecoms sector, driven by Vodafone’s decision to halve its payment. Bellway’s reduction also brought housebuilders lower after it cut its total dividend from £1.40 to £0.54 last year, with investors receiving the final payment at the start of the first quarter.

Going forward, we could see company profits take a hit as a result of the trade disruption caused by US president Donald Trump. However, the UK market could be more sheltered than others given Trump hasn’t singled it out as a target for higher tariffs.

“Dividends are typically less likely than company profits to experience short-term fluctuations either during economic turbulence or in boom times, as most companies seek to deliver steady income growth over time for their investors,” said Mark Cleland, chief executive of issuer services at Computershare.

“Nevertheless, any cooling driven by the current upheaval in financial markets and the real global economy is likely to affect profits and this will subsequently [influence] dividend payouts.”

In terms of the timing, any effects are more likely to appear in several quarters’ time, as dividends are a lagging indicator. Cleland says that discretionary special dividends have proved “more vulnerable” in challenging economic periods historically.

Which sectors showed the highest dividend growth?

Airlines, leisure and travel showed strong dividend growth in the first quarter, with total dividends up 75.3% year-on-year. EasyJet was an important driver. The airline increased its total dividend from 4.5 pence per share to 12.1 pence, after announcing a 34% jump in profits in 2024.

General financials, property companies and healthcare and pharmaceuticals also saw good growth.

In cash terms, healthcare and pharmaceutical companies were the largest contributors, returning £3.2 billion to shareholders in dividends overall. Total payouts were up 7.6% year-on-year.

Oil, gas and energy companies came in second, returning £2.7 billion, but this translated into a headline growth rate of -1.9%. Computershare said lower oil dividends largely reflected reduced share counts, as a result of large share buyback programmes.

Share buybacks are another method companies use to return cash to shareholders, so it is worth considering them alongside dividend payments. Between them, Shell and BP spent £19 billion repurchasing their shares in 2024.

Share buyback activity has increased significantly in the UK market since the pandemic, with total buybacks hitting £63.2 billion in 2024. FTSE 100 companies have already announced buybacks worth £30.9 billion in 2025, according to investment platform AJ Bell.

Top companies for dividends

The top five payers in cash terms were AstraZeneca, Shell, British American Tobacco, BP and Unilever. Together, they paid out £7.5 million, which represented 54% of total UK payouts in the first quarter, according to Computershare.

The top 15 payers were responsible for 83% of the total, pointing to some concentration risk. This may add to investor concerns in light of the challenging macroeconomic backdrop. However, experts believe there is reason to be optimistic when it comes to the UK market.

“It’s important to remember that UK companies are in a healthy position with strong balance sheets, while ordinary dividends are well covered by profits – much more so than at the start of the Covid pandemic,” said David Smith, portfolio manager at Henderson High Income Trust.

Smith believes ordinary dividends will be resilient going forward, and is “encouraged” by the typical (or median) growth rate of 3.3%, highlighted in the Computershare report. This is in line with his expectations for underlying dividend growth this year.

Special dividends and share buybacks are more likely to be pared back by companies looking to preserve cash flows.

Should income investors buy UK equities?

The UK market is expected to pay out £90.1 billion in total dividends this year, the same as in 2024. A stronger pound is likely to act as a headwind, reducing the sterling value of dividends declared in dollars.

Despite this, UK equities could still prove attractive to income-hungry investors. They are expected to yield 3.7% over the next 12 months, according to Computershare. For comparison, 10-year gilts are yielding 4.5% at the time of writing.

Gilts are less volatile than the stock market, but equities offer greater opportunities for capital growth. This means they are generally better placed to outpace inflation over the long term. Inflation is expected to hit 3.75% later this year.

It is also worth noting that the total cash yield on UK equities is far higher when share buybacks are taken into consideration.

FTSE 100 companies are expected to pay out £83 billion in 2025, according to consensus estimates shared by AJ Bell. Total buybacks worth £30.9 billion have been announced to date. This takes the FTSE 100 to a total “cash yield” of 5.2% – far more attractive.

The FTSE 100 has significantly outperformed its US counterpart so far this year, up 2.9% as of market close on 24 April. The S&P 500 is down almost 7% over this period.

Regular dividends from UK companies fell 0.4% in 2024, according to new analysis from Computershare.

Dividends are an important part of investing in stocks. While some equities are best added to a portfolio for their future share price growth potential (growth stocks), others are sources of income. Anyone considering buying new stocks needs to consider whether they are aiming for growth or income.

UK businesses paid out a total of £92.1 billion through the year, 2.3% more than in 2023, but this figure includes one-off payments. Total regular dividend payments fell to £86.5bn, marking a decline on the previous year.

However, the decline was mainly driven by falling dividend payments from mining stocks. The mining sector had been the top dividend payer between 2021 and 2023, but mining dividends fell by $4.5 billion, or 40%, in 2024.

Factoring out mining – which is heavily exposed to macroeconomic business cycles – dividend payouts from UK companies increased by 8.4% including one-off payments, and by 4.0% on an underlying basis.

“It is worth highlighting that dividend growth was better outside the highly cyclical mining sector,” said Mark Cleland, CEO issuer services, Computershare. “In addition, share buybacks are having an impact, diverting an estimated £42-45bn of cash in 2024 to shareholders that might previously have been paid mostly in dividends.”

Ex-mining sector dividend growth of 4.0% is “reasonable given the uncertain economic outlook”, says David Smith, portfolio manager at Henderson High Income Trust.

“The impact of the UK Budget is likely to curtail dividend growth for some domestic businesses given corporate margins are coming under pressure from the increase in National Insurance and minimum wage,” Smith added. “ However one must remember that 75% of the UK market’s revenues are derived from overseas where the global economy is improving.

“Additionally the outlook for dividends in the banking sector is robust, especially in an environment of higher for longer interest rates, while the negative impact from dividend cuts in the mining sector is coming to an end.”

Which UK sectors and shares are best for dividend yield growth?

According to AJ Bell, the following five companies posted the highest dividend yield growth in the FTSE 350 last year:

Source: AJ Bell, Sharescope, Company announcements. Based on the most recent annual dividend declaration. Data from 1 Jan to 3 December 2024. Excludes special dividends.

Computershare’s report shows that the best sectors for UK dividend stocks in 2024 were banking, which paid out 28.8% (£873 million) more in dividends during 2024 than 2023; insurance, which benefitted from Direct Line (LON:DLG) restoring its previously-cancelled dividend; and food retailers, with Tesco (LON:TSCO) increasing its dividend and Marks & Spencer’s (LON:MKS) making a comeback.

Besides mining, housebuilding was the other sector to significantly cut dividends. Persimmon (LON:PSN) and Bellway (LON:BWY) in particular dragged the sector’s average yield down by reducing their payouts.

The FTSE 250 isn’t traditionally the favoured hunting ground for high dividend yields, but if investors are selective then the best FTSE 250 dividend stocks could deliver yields well in excess of the FTSE 100’s average.

Indeed, the FTSE 250’s dividend yield change outperformed the larger index during 2024. Both indices’ yields fell during the year, but the FTSE 100’s by 0.9% compared to the FTSE 250’s 0.4%. This doesn’t account for the impact of high-dividend stocks like Howden Joinery (LON:HWDN) being promoted into the FTSE 100; this, according to Computershare, knocked 2.5 percentage points off the FTSE 250’s dividend yield growth.

What is the outlook for UK dividends in 2025?

Dividends from UK equities are expected to display limited growth this year, and in fact – given the precarious state of the UK economy – might underperform the yields that investors could realise from bonds.

“Over 2025 we predict equities to yield 3.8%,” says Cleland. “The top 100 is likely to yield 3.8% and the mid-caps 3.5%.”

These yields are below the returns that 10-year gilts are yielding, which increased to over 4.6% in recent weeks. Gilts are generally regarded as a safer investment than equities, and in the current climate they are also offering higher yields.

“This means UK gilts are offering a significantly better income than shares at present for a lower risk (if they are held to maturity),” says Cleland.

Computershare’s analysis predicts “dividends in 2025 to reach £92.7bn at the headline level: up just 0.7% year-on-year”.

How have share buybacks impacted UK dividends?

Dividends aren’t the only means by which companies return capital to shareholders. They also do so via share buybacks, and UK companies have ramped these up over the last year.

Computershare estimates the size of UK share buybacks in 2024 at £42-45 billion; “less than the record achieved in 2022 when companies returned cash preserved during the pandemic-inspired dividend cuts but well above the pre-2020 annual average”, says Cleland.

Buying back shares reduces the number in circulation, so increases the value of those that remain. However, it also makes less money available for dividend payments, and Cleland argues that this has been another contributing factor to the decline in dividend payments.

“The trend for companies to buy back their shares with excess cash at the expense of special dividends continues,” says Smith, while adding that “underlying dividend growth next year should be supported by international earners and banks, while dividend cover for the UK market in aggregate is healthy.”

The UK market is a renowned destination for dividend seekers, boasting a yield of just under 4%, which eclipses that of many other markets. However, the reliability of these payouts is not guaranteed. Five of the top eight dividend payers have cut their dividends in the past 15 years, with one company reducing its payout three times. Furthermore, 40% of the dividends in the index stem from cyclical sectors, which are susceptible to fluctuations in interest rates and commodity prices.

Our trust aims to provide a solid return in capital and income by investing in stocks with resilient and growing dividends. This strategy results in a concentrated portfolio of 36 firms that diverges significantly from the FTSE All-Share. We target high-quality companies, have a 20% allocation to leading European firms and are notably overweight in UK mid-caps. This approach has enabled the trust to sustain and grow its dividend for 42 consecutive years. Here are three stocks that meet the trust’s high standards.

Three British stocks with growing dividends

Softcat (LSE: SCT) provides IT hardware, software, and services to around 10,000 small and medium-sized firms across the UK. The company boasts an impressive 20-year record of achieving double-digit growth in gross profit. In today’s competitive landscape, IT spending is no longer optional for businesses; it is essential. Softcat has surpassed its competitors to become the market leader, thanks to its comprehensive product offerings and a unique corporate culture that fosters excellent customer service. Despite this success, Softcat holds only 5% market share, suggesting ample opportunity for future growth. It is cash-generative, operates with no debt and returns most of its earnings to shareholders through dividends. With solid fundamentals and a proven growth strategy, Softcat is purring with momentum.

Unilever (LSE: ULVR) is turning its fortunes around under new CEO Hein Schumacher. From Dove soap to Hellmann’s mayonnaise, the product range reaches 3.4 billion consumers daily. Schumacher’s plan to simplify and focus the business is showing results, with early signs of volume growth and margin expansion.

The company is committed to sustainability, aiming for reduced emissions and responsible sourcing practices, which enhances the brand’s reputation and supports its attractive 3.5% dividend yield. With a solid strategy in place and a renewed focus on innovation, Unilever offers a resilient prospective return.

National Grid (LSE: NG) is poised for a brighter future, driven by a supportive regulatory environment, a strengthened balance sheet and ambitious plans for investment. National Grid hopes to invest £60 billion over the next five years. With half of its operations based in the US, the company benefits from favourable regulatory returns that enhance its financial stability.

In the UK, electricity infrastructure needs to be upgraded to meet the rising demand for secure and low-carbon energy. Energy use is accelerating – data centres, for example, account for 1.8% of the UK’s electricity load, but this figure is projected to rise to 6% by 2030 - and new projects await connection to the grid.

National Grid’s UK operations are vital for the energy transition, with 80% of capital investment focused on enhancing electricity networks that connect wind-energy generation in Scotland to high-demand areas in the south. Collectively, these factors position National Grid to achieve double-digit asset growth and compelling earnings growth in the coming years. This trajectory supports an appealing yield and also offers inflation protection for investors looking for stability in an evolving energy landscape.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Analysts have tempered their dividend expectations slightly and now expect the FTSE 100 to pay out £78.5 billion in 2024 as a whole, according to AJ Bell’s dividend dashboard. At the start of this year, they were forecasting £79.7 billion.

While this figure isn’t too far short of 2018’s all-time high of £85.2 billion, it also means the FTSE 100 will have delivered almost no dividend growth this year compared to 2023.

UK equities could still be worth a look for income-focused investors, though.

The FTSE 100 is currently offering a dividend yield of around 3.6%. This doesn’t sound great when you consider cash savings accounts currently pay up to 4.85% – and with no investment risk.

However, this dividend yield doesn’t take other forms of cash return into consideration – such as buyback activity and takeover moves.

When these other forms of cash return are included, the FTSE 100 yields 6.5% overall.

By casting their gaze wider to include mid-cap companies as well (tracking the FTSE 350, for example), investors could potentially bolster their yield further. The FTSE 350 offers a total cash yield of 8.3%. Again, this includes buybacks and takeovers as well as dividends.

Russ Mould, investment director at AJ Bell, points out that this compares favourably to the Bank of England base rate, 10-year government bond yields and the headline rate of inflation. These are 4.75%, 4.6% and 2.6% respectively.

Of course, as well as income, equities also offer the potential for share price growth. The FTSE 100 is up around 5% year-to-date at the time of writing, but has underperformed its US and global counterparts.

UK dividend outlook for 2025

Analysts currently expect the FTSE 100 to pay out £83.6 billion in dividends in 2025, a 6.5% increase compared to 2024.

Total pre-tax income (an important indicator of a company’s financial health and ability to pay dividends) is also expected to reach £248.8 billion, according to AJ Bell.

This figure would constitute a new peak, although Mould points out that the forecast has slipped in the past three months, mainly due to weakness in oil and metal prices. This has had a knock-on effect on oil and mining companies.

Investors should also be wary of concentration risk. Just 10 companies are expected to pay out 54% of total FTSE 100 dividends in 2024. The top 20 are expected to pay 71%.

Commenting on the broader outlook and how it could translate into investor flows, Mould says: “It may be that stronger global economic growth and upgrades to earnings and dividend forecasts are required before the UK really catches investors’ imagination once more, despite its potential yield appeal.

“That appeal rests primarily on its forecast forward yield of 3.6% for 2024 and 3.9% for 2025, based on ordinary dividend payments, with £3.3 billion in special dividends on top from HSBC, Associated British Foods and Berkeley.

“Further cash returns come in the shape of share buybacks, which are nearing prior-peak levels, and takeover activity, with almost 50 UK-listed firms on the receiving end of a closed or live approach.”

Should you buy UK equities?

The domestic market offers strong income opportunities, but an important question for investors is whether they want to opt for this or buy into a market with greater growth potential.

For context, the FTSE 100 has delivered an annualised return of just over 6% over a five-year period. Meanwhile, the MSCI World has delivered 13% and the S&P 500 has delivered almost 16%.

Proponents of UK equities say they are undervalued, making them cheap compared to their global and US counterparts. To benefit from this and reap outsized share price returns, though, there would need to be a catalyst for a re-rating.

“The million-pound question is when will the market re-rate?,” say Ben Russon and Richard Bullas, co-heads of UK equities at investment firm Martin Currie. “That we cannot predict. What we do know is that the UK stock market offers incredible value; those who are invested when it finally re-rates could be richly rewarded.”

The good news is that investors are at least being paid for their patience, enjoying a decent overall cash yield in the meantime.

Dividend payouts dropped by 8% last quarter, but UK equities could still offer strong opportunities for income-hungry investors.

Total payouts came to £25.6 billion in Q3, according to financial services company Computershare. This is down from £27.8 billion a year ago, as cuts in the mining and utilities sectors took their toll, alongside a drop in one-off special dividends.

Despite this, “dividend growth in the third quarter was much more encouraging than the figures suggest,” says Mark Cleland, chief executive of issuer services at Computershare.

Indeed, median (or typical) growth at the company level looked more promising at +4.5%. Mid-cap companies also posted better underlying growth (+3.6%) than the top 100 firms (-4.4%). Furthermore, if the mining sector was excluded, Computershare says the underlying growth rate overall would have been +2.6% on a constant-currency basis.

Large share buybacks are also partly responsible for the lower headline figure. Share buybacks have become increasingly common in the UK equity market in recent years, as companies take the opportunity to snap up their stock at low valuations.

Share buybacks reduce the number of shares in issuance and use up cash that might otherwise be paid out in the form of dividends. But investors should remember that “buybacks mean additional cash reaching shareholders, albeit in a different way,” explains Cleland.

Given how common buybacks have become, Cleland says they “need to be taken into account when understanding the overall increase in cash distributions by UK companies”.

As well as buyback activity, a stronger pound also contributed to the lower headline figure.

Until recently, the Bank of England appeared to be taking a more hawkish stance on rate cuts than other central banks, and this caused the value of the pound to rise. Cleland points out that this “negatively impacted the two-fifths of UK dividends that are declared in US dollars”.

Which sectors and stocks paid the highest dividends?

Banks were the biggest dividend payers in Q3, accounting for £3.3 billion of the £25.6 billion total. However, dividend growth in the sector was broadly flat compared to the same period a year ago, at 1.1%.

The mining sector was the second biggest contributor to the overall figure, paying out £2.9 billion in total, but this constituted a 32.9% drop on a year ago.

In terms of their contributions to the overall percentage growth figure, the mining and utilities sectors made the largest negative impact this quarter and pharma and industrials made the largest positive impact.

Top five sectors

Meanwhile, the top five companies with the biggest payouts were Rio Tinto, Shell, National Grid, HSBC and British American Tobacco. Collectively, they were responsible for £7.5 billion of the £25.6 billion total – equivalent to 29%.

It is worth noting that two of the top five are miners and one is a utilities company. In other words, despite the decline in mining sector payouts, they remain an essential stalwart of any income-generating portfolio.

Computershare explains: “Nine-tenths of the £2.6 billion decline in headline mining company dividends was driven by Glencore, which is preserving cash to fund its recent $6.9 billion acquisition of Canadian steelmaker Teck Resources.

“Lower profits from weaker commodity prices have played a role too and also explain lower payouts at Anglo American and Antofagasta.

“Rio Tinto will be the sector’s biggest payer this year – it held its dividend steady in the third quarter, reflecting stable revenues and lower costs, yielding profits more in line with pre-pandemic trends.”

Top five stocks

Note: Where the base currency is USD, dividend per share has been shown in the base currency with a GBP conversion also provided. The currency conversion also impacts the year-on-year change.

Should you invest in UK dividend stocks?

UK equities could still offer good opportunities for income investors, despite the fact that full-year dividend forecasts are now being downgraded.

In its quarterly report, Computershare says it expects total UK payouts to amount to £92.3 billion in 2024, including one-off special dividends. This would equate to an annual growth rate of 2% versus the 3.8% that was forecast previously.

Meanwhile, regular dividends (excluding one-off payments) are expected to come in at £86.8 billion, down 0.3% on last year.

Despite this, Computershare still expects UK equities to yield 3.7% over the next 12 months. Investors should note that this figure only includes dividend payments and does not consider any other form of cash returns.

The yield is significantly higher when you include these other factors. Earlier this month, AJ Bell argued that the FTSE 350 (FTSE 100 + FTSE 250) has an overall cash yield of around 7.7% when dividends, buybacks and takeovers are considered together.

For comparison, 10-year government bonds are currently yielding just over 4%, the UK base rate is 5%, and headline inflation is 1.7%. Against this backdrop, a 7.7% yield with the potential for capital growth on top starts to sound a little more appealing.

Going forward, Cleland thinks the outlook for UK dividend growth could look stronger, driven by developments in the oil and mining sectors.

“The conflict in the Middle East has already begun to drive oil prices higher. The range of possible outcomes from this is wide, but higher prices could boost profitability in the oil sector and potentially push up dividends in 2025,” he says.

“With the worst of the cuts in the mining sector likely now behind us, broad-based dividend growth from the rest of the market will be easier to see in 2025,” he adds.

FTSE 100 dividend forecasts in 2025 are dipping again, pushing 2018’s all-time high of £85.2 billion out of reach until at least 2026. The index having gained 6.8% year to date (sending down the dividend yield) plus falling profit forecasts, also takes some of the shine off the appeal of UK equities for income, but a glut of share buybacks is set to boost returns for investors.

Analysts now expect £80.4 billion in dividends from the FTSE 100 in 2025, down from the £83 billion expected three months ago, and barely a 2% increase on 2024, according to AJ Bell’s latest dividend monitor for the second quarter of 2025.

This puts the FTSE 100 on a forward dividend yield of 3.5% based on aggregated analysts’ forecasts for 2025, after the index’s solid gains in the year to date. The UK’s premier index has provided a 9.6% total return so far in 2025, compared to just 2.1% from the S&P 500, as the US has started to lag on the global stage.

Share buybacks supplement FTSE 100 dividends

The FTSE 100’s 3.5% dividend yield is being supplemented very nicely by share buybacks.

Buybacks can be good news for investors, as they usually offer shareholders the opportunity to sell their stock at a premium price. They can also help push the share price up for those who decide to hold on to their investment.

While the final tally for buybacks in 2024 was £58.3 billion, just enough to exceed 2022’s total and set a new record high, FTSE 100 companies are already ahead of that game this year.

They have already declared buybacks worth £39 billion, more than half last year’s total in the first quarter alone, although two – Next and Bunzl – have called a temporary halt to their schemes.

Adding together the forecast dividend total of £80.4 billion to the planned buybacks gives a total cash return of £119.4 billion, some 5.25% of the FTSE 100’s total £2.3 trillion stock market valuation.

Russ Mould, AJ Bell investment director, said: “That cash yield beats inflation, the 10-year gilt yield and the Bank of England base rate which, on balance, still seems set to go lower before it goes higher once more.”

None of the 100 firms listed on the index has yet declared a special dividend for 2025. Last year, HSBC, Fresnillo, Berkeley Group, Associated British Foods and Admiral all offered such payments, worth a total of £3.7 billion between them.

“Any similar distributions could further top up the cash pot, as could any merger and acquisition activity,” said Mould. “A predator is yet to circle a FTSE 100 member in 2025, but buyers of UK assets have tabled bids worth a total of £20 billion already this year, after £49 billion-worth of successful approaches in 2024. Takeover deals can therefore also add to the total return from the UK equity market overall.”

Which FTSE 100 companies are increasing dividends?

While the FTSE 100 remains attractive for income-seekers there remains a fair degree of concentration risk within the UK’s headline index. Just 10 companies are predicted to pay out 53% of the forecast total dividends for 2025, at £42.4 billion, and the top 20 are expected to contribute £55.7 billion, or 69% of the estimated total.

There seems little likelihood this concentration risk will abate anytime soon, as companies hold fire on paying out dividends they may have to cut later.

“In terms of dividend growth, analysts seem to think that big increases will be a relative rarity in 2025, perhaps because buybacks are playing a big role in capital allocation plays – a board and chief executive are likely to draw less flak for a pause in a buyback than they are for a dividend cut,” said Mould.

Investors also need to bear in mind the role of the pound, he added, whose strength against the euro and particularly the dollar this year reduces the sterling value of the dividends declared in those currencies by 28 current members of the FTSE 100.

Source: AJ Bell Q2 2025 Dividend Dashboard, company accounts, Marketscreener, consensus analysts’ forecasts, LSEG Datastream. Ordinary dividends only.

Top 10 dividend yields in the FTSE 100

The top 10 yielding companies in the FTSE 100 include a mix of investment and financial services companies, banks, miners and tobacco companies. This is fairly typical – investors often turn to these sectors for the attractive dividends on offer.

However, it is important that the figures in the below table are understood in context.

A high dividend yield is often a good thing, suggesting cash is being returned to investors. But it can also just be a sign of a falling share price (as dividend yield is calculated by dividing the total annual dividends by the share price).

It is also important to look at a company’s dividend cover and payout ratio to understand whether any cash returns are sustainable.

Dividend cover shows you how many times a company could afford to pay dividends to shareholders based on its income. Meanwhile, payout ratio shows you how much of the company’s earnings would be spent on meeting any dividend payments.

A payout ratio over 100% suggests a company could be paying more in dividends than it can afford based on its earnings.

Source: AJ Bell Q2 2025 Dividend Dashboard, company accounts, Marketscreener, consensus analysts’ forecasts, LSEG Datastream. Ordinary dividends only.

Dividend cover of 2 times is typically viewed as positive for ongoing payouts, allowing companies to weather any economic shocks that would otherwise see them cut dividends. Currently dividend cover is just above this level at 2.01 times.

This level is also far higher than the lows seen in 2015/16, when there were a raft of dividend cuts.

“Analysts seem confident enough in the outlook for 2025 as they expect 89 FTSE 100 members to raise their dividend in the coming year, with just five seen at risk of a cut (compared to a dozen actual reductions in 2024),” said Mould.

But the increases are far from substantial, and earnings estimates are falling.

“Investors will have to keep an eye on cash flow statements and balance sheets, as well as profit and loss accounts, even if those buybacks may provide some sort of cash buffer that could be redirected toward supporting dividends, if push ever comes to shove,” said Mould.

Shareholders have enjoyed decent dividend payments from UK equities so far in 2024. However, the earnings picture going forward is weakening against a backdrop of limp economic growth and higher interest rates. 

As a result, dividend growth is likely to slow over the course of the year, according to the latest data from Computershare’s quarterly dividend monitor. 

The UK equity market has long been known as a strong income generator – even if its returns have been less exciting than those generated by the US stock market in recent years. With this in mind, what does the latest dividend outlook mean for UK equities? 

We look at how the dividend yield in the UK equity market compares to other regions and asset classes. Should you still invest in UK income stocks? And which companies are currently offering the highest dividend yields? 

UK dividend performance in 2024

Dividend payments started the year “on a positive note”, according to the latest Computershare report, rising by 4.9% in the first quarter of 2024. However, this figure was boosted by one-off special payments with regular dividends growing at a slower rate of 2%. 

The outlook for dividend growth over the rest of the year looks more modest though, according to Mark Cleland, CEO of Issuer Services at Computershare. He said: “Dividends were healthy in the first quarter of 2024, but the general picture of flat or slowly growing dividends in most sectors is setting the tone for the whole year.” 

“Only the banks and the recovering leisure and travel sector look likely to deliver double-digit growth this year, while only the mining sector, which is defined by the ups and downs of the commodity cycle, seems set for double-digit declines”, he added. 

Businesses are currently operating in a tough economic backdrop, with interest rates having been held at their current level of 5.25% for the past five Bank of England meetings. The UK dipped into a recession in the final quarter of 2023 and, while growth has been positive so far in 2024, it has been modest at 0.3% in January and 0.1% in February. 

While inflation has eased from its peak, it is still relatively sticky at 3.2%, and the cost of capital for businesses is currently high. “This makes it difficult for companies to build earnings momentum”, says Cleland, “which influences how much boards decide to return to shareholders in the form of buybacks or dividends.”

Are UK income stocks still worth it?

It’s not all bad news though. The twelve-month prospective yield on UK equities currently stands at 4%, according to the report, which is the same as its position three months ago. This is considerably higher than the yield on offer in other equity markets around the world. 

US equities are currently yielding around 1.4%, while global equities are yielding around 1.8%. That’s according to data from Morningstar Direct, based on proxies for the S&P 500 and the MSCI World Index. 

What’s more, despite the FTSE 100 being in the news this month after reaching a record high, UK equities are currently trading at a large valuation discount compared to their global peers. In other words, this income opportunity comes cheap. 

Of course, the best savings accounts are currently offering interest rates north of 5%, and you don’t have to take on any investment risk at all when you put your money in the bank. 

However, savings rates look like they have now peaked, with some providers already pulling their best deals. This will only accelerate once the Bank of England starts cutting interest rates. Markets are currently expecting the first cut to the base rate to come in August or September.

With this in mind, “it might be time to look elsewhere for returns”, says Aarin Chiekrie, equity analyst at Hargreaves Lansdown. “There are lots of UK companies offering attractive cash returns in the form of dividends, with the added benefit of capital gains if the underlying business performs well.” 

Chiekrie adds that the UK’s dividend-paying potential is one of its key attractions, and points out that it has “plenty of mature companies boasting strong dividend cover and the potential for income to grow over the long term.”

Shares versus bonds: how do their yields compare?

The rapid rise in interest rates in 2022 and 2023 has had a big impact on the bond market and, for the first time since the global financial crisis, bonds are offering meaningful real returns. 

Against this backdrop, some investors might be left wondering whether they would be better putting their money in bonds rather than equities. 

Bonds come with a lower level of risk and, unlike dividends, which are paid at a company’s discretion, bond issuers are contractually obliged to meet any interest payments. 

What’s more, unless the issuer goes bust or defaults, bondholders are repaid in full on the bond’s maturity date. Meanwhile, equity investors may end up selling their shares at a loss if the company runs into difficulties.

Despite this, the long-term return potential is greater with equities, particularly if you are investing for growth as well as income.

Commenting on the current opportunity set, Jason Hollands, managing director at Bestinvest, said: “Inexpensive valuations on UK equities mean UK dividend yields are pretty attractive currently, with the FTSE 100 yielding ~4% based on forecast earnings for the next 12-months.”

“While 10-year gilts – bonds issued by the UK government – are yielding a little more at 4.3%, UK equities also offer the prospect of capital growth and the potential for rising dividends from here, as current payout rates by UK companies are not high by historic standards.” 

“It is also worth flagging that alongside paying attractive dividends, over half of large UK companies have announced share buyback programmes over the year, which should help boost returns”, he added.

Which UK companies have the highest dividend yields?

The following companies are the top five yielding stocks in the FTSE 100:

Source: Computershare Dividend Monitor and Factset as of 29 April 2024.

However, while the dividend yields on offer look attractive, investors should also consider the long-term prospects for each company’s share price, as this will impact your total return too. If a company pays a dividend of 10% but its share price falls by 10%, you haven’t made any money at all. 

Indeed, despite Vodafone’s high dividend yield, investors would have actually made a loss of just over 30% (cumulative total returns) if they invested in the stock five years ago and continued to hold it to this day. 

Meanwhile, investors in Phoenix would only have returned a measly 2.68% over the same period. HSBC investors, on the other hand, would have returned over 25%. That’s according to data from Morningstar Direct.

It is also worth remembering that yields are calculated by looking at a company’s dividend as a percentage of its share price. As such, the dividend yield will rise if the share price falls. In an instance like this, it isn’t because the company has decided to increase its dividend. It is just simple maths. 

Of course, if a company’s share price is low but its dividend is high, you might see it as offering good value. If the company is well run and has good prospects for the future, there is always a chance its share price will rise once investors realise its potential.

Dividends had fallen out of favour until recently. Technology companies tended to look down on them because they saw them as a sign that a company’s growth had peaked, while boards increasingly preferred to return money to shareholders through buybacks. During the pandemic many cash-strapped firms stopped paying dividends altogether, arguing that the need to conserve cash amid the economic uncertainty was more important.

However, they are still an important symbol that a company is doing well enough to generate cash consistently – something particularly important as investors can now get a decent return from a savings account. So, when a company that has stopped paying its dividends starts doing so again, it pays to take note. 

One company that recently announced the resumption of its payout was the budget airline easyJet (LSE: EZJ). Like most carriers, it has struggled over the past few years, with the collapse in travel thanks to Covid leading to large losses in 2020 and 2021, followed by a much smaller loss last year. It also had to endure the embarrassment of a potential legal battle with its founder Stelios Haji-Ioannou, who threatened to sue the company after it decided not to cancel completely a large order of planes that it made just before lockdown (the two sides later came to an agreement).

The good news is that the future looks much rosier, vindicating the decision to buy more planes. Despite fears that the cost-of-living crisis would prompt customers to cut back on travel, easyJet enjoyed a strong performance this summer and managed to use its dominant market position to pass on the increased fuel costs to customers in the form of increased ticket prices. In fact, easyJet is now so positive that a few weeks ago it decided to expand its fleet further, unveiling a deal with Airbus that will see it buy an additional 157 planes for delivery from 2029, with the option to add a further 100.

EasyJet full-year results

This week shares in EasyJet rose by almost 4% after it produced an annual profit, thanks to a jump in demand for travel, says Leke Oso Alabi in the Financial Times. With revenue up by 42% to £8.2bn in the 12 months of September, the company made a pre-tax profit of £455m, compared with a loss of £178m in 2022. While warning that early winter results for its 2024 fiscal year would be affected by geopolitical events, it thinks bookings have “started to come back quite significantly”. 

Early data seems to support EasyJet’s conviction that “households will continue to prioritise travel in the new financial year”, though this could quickly change if the UK falls into recession, or the conflict in the Middle East worsens, says Sophie Lund-Yates at Hargreaves Lansdown. Still, while EasyJet’s problems “are all outside of its control”, its “best-in-class operation” is about as good as it can be. In particular, its “measured expansion at high-calibre airports has proved an especially shrewd move”, as has the “supercharged effort to push easyJet holidays”. Both strategies have taken advantage of the fact that “cost and convenience” are now the “ultimate precursors to whether or not customers will splash on a trip”. 

EasyJet is particularly well placed if the coming summer season turns out better than expected, says Kate Duffy on Bloomberg. It plans to increase capacity by 8% this year, while it has also hitherto minimised the supply chain hiccups that have left its competitors “struggling to field aircraft”. For instance, Ryanair is scrambling to get hold of Boeing 737 Max planes. 

These supply constraints should help support demand, so it’s not surprising that easyJet CEO Johan Lundgren is optimistic.

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At a time when investors can pick up a high income from bonds, the real value of a stock market portfolio is its ability to grow income and capital over time. This growth potential is particularly important when inflation is likely to be structurally higher, and preserving the real value of invested wealth is increasingly difficult. 

100 years may be beyond the time horizon of many investors, but Murray Income’s growth since it was founded in Glasgow on 8 June 1923 shows what is possible. The Second Scottish Western Investment Company started with an initial share capital of £500,000 and on 30 June 2023, its net asset value was nearly £1bn. That’s quite some appreciation. 

For many of our investors, dividend growth will be every bit as important, and 2023 was the 50th year that Murray Income has grown its dividend. It was an important milestone and that growth has been delivered in a range of market environments – from the oil price shocks of the 1970s, to the international debt crisis of the 1980s, the fall of the Berlin Wall in 1989 and the collapse of the Eastern bloc, onto the technology boom and bust of the 2000s and the Global Financial Crisis and its aftermath in the 2010s. 

Finding growth today

Today, we find ourselves in another new environment. After a decade of near-zero interest rates, borrowing costs have risen rapidly in response to the mounting inflation. Investors can now get a high and reliable income from both cash and bonds, creating greater competition for dividend-paying equities. The important differentiator for a stock market portfolio today is the growth in income and capital it can generate, and the inflation protection it offers as a result.  

Murray Income has grown its payouts to investors by an average of 9.2% per year over the last 50 years. This is well ahead of inflation, which has averaged 5.5% since 1973. One of the key reasons for achieving this dividend growth record is a focus on a diversified portfolio of high quality companies. We have always invested in strong, established companies with a track record of growing their earnings and an ability to pay a rising dividend to shareholders. 

We look for certain characteristics: a robust business model that allows a company to protect its competitive advantage, and a strong balance sheet with little debt, that gives a company optionality and defensiveness in a range of market conditions. We like a strong management team, with a commitment to dividend growth, and strong environmental, social and governance performance to show proper risk management. 

Once selected, these companies need careful monitoring over time. Even the best companies will go through difficult patches, get taken over, make mistakes. Maintaining a fluidity and agility in portfolio selection helps ensure that companies sustain those traits over time.

Unstoppable trends

Any portfolio with aspirations to deliver reliable income growth over time needs to be aligned to unstoppable long-term trends. Today, those trends include the energy transition and decarbonisation, which leads the trust to TotalEnergies, an energy company with an attractive pipeline of renewable assets and SSE, a utility company, focused on networks and renewables.

Demographics is also a focus, with ageing populations driving demand for areas such as pharmaceuticals (through Astra Zeneca or Novo Nordisk) and medical equipment (through Convatec). While the UK stock market is seen as a technology desert, there are companies benefiting from the digital transformation, including accounting software group Sage and information provider, Relx.

At the same time, there is a rising middle class in many emerging markets. UK companies such as Unilever are firmly plugged into this trend, with established businesses in developing economies. 

The latest company to enter the portfolio is a good illustration of the type of company we like. Rotork manages industrial flow control equipment. Its businesses include hydrogen and carbon capture and it has a fast-growing business in the US. It is a mid-cap company, trading below its historic average, which also has compelling ESG characteristics. It has a conservative management team and high margins, plus significant intellectual property. 

Beyond the index

This is not how many investors view the UK stock market, preferring to focus on its low growth, old economy stocks. This is why we argue strongly against an index approach, or an approach that focuses only the UK’s largest dividend payers. To target income and capital growth, it is vital to look deeper. The UK has a range of interesting and exciting companies for those willing to look hard enough.

The investment trust structure has also been important in delivering a growing income and we believe it will continue to be so in future. We do not use our revenue reserve often, just eight times over the past 50 years, but at times of financial crisis, or pandemic, the ability to use those reserves has been invaluable. Today, the trust has around half of its annual dividend held in reserve, ready for the next crisis, should it appear. 

While investors may be able to get 5% on a gilt, they shouldn’t neglect growth in their income portfolio. That growth will be vitally important to preserve the purchasing power of their income at a time when inflationary pressures are elevated. At various points in the past 100 years, the environment has been every bit as challenging as it is today, but Murray Income’s approach has allowed it to keep improving capital and income growth for shareholders year after year. 

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

Discrete performance (%)

Five year dividend table (p)

Total return; NAV to NAV, net income reinvested, GBP. Share price total return is on a mid-to-mid basis. Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value. Source: abrdn Investments Limited, Lipper and Morningstar.  

Important information 

Risk factors you should consider prior to investing: 

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested. 
• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.  
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares. 
• The Company may charge expenses to capital which may erode the capital value of the investment.   
• Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss. 
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value. 
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.   
• Certain trusts may seek to invest in higher yielding securities such as bonds, which are subject to credit risk, market price risk and interest rate risk. Unlike income from a single bond, the level of income from an investment trust is not fixed and may fluctuate. 
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.

The Key Information Document (KID) for the Trust can be found on the website: www.murray-income.co.uk/literature 

Find out more at www.murray-income.co.uk or by registering for updates. You can also follow us on social media: Twitter and LinkedIn.

What’s the better investment, growth stocks or dividend stocks with high dividend yields? It’s the age-old question, but why should investors have to choose? An alternative option, one that combines the best of both worlds, is to look for the market’s best dividend growth stocks.

This approach merges the benefits of seeking out growth stocks with robust cash flows, which will underpin further growth and shareholder returns. 

What’s more, dividend growth stocks come with an added psychological benefit. It’s hard watching the stocks you own fall 50%, but if you’re still picking up a couple of percentage points in income on the purchase price every year, that cushions the blow. 

You could also reinvest this income, buying more at lower prices to benefit from higher returns in the long term. 

A case for dividend growth 

S&P Global made this point in a paper published in June last year titled A Case for Dividend Growth Strategies.

The paper looked at the performance of equities in the S&P High Yield Dividend Aristocrats® index, which tracks a basket of stocks from the S&P Composite 1500® that have consistently increased their dividends every year for at least 20 years (the average in the index is 37 years). It compared the performance of these equities to those in the S&P 500® High Dividend Index—a high-dividend strategy built on the S&P 500. 

Those companies in the Dividend Aristocrats index had lower levels of leverage, high returns on equity and higher earnings per share growth over the previous three years compared to those in the standard S&P 500® High Dividend Index. In fact, over the three years to March 31, 2022, those in the latter index saw earnings per share fall -2% compared to 8.1% growth for the Dividend Aristocrats. 

And when it comes to dividend sustainability during times of stress, there’s a clear trend in the data. 29 constituents of the S&P 500 High Dividend Index, 36.1% of the index cut full-year dividends between 2019 and 2020, while only 7.2% of S&P High Yield Dividend Aristocrats Index constituents did so over the same period. 

Outperformance with income 

Looking back over the period December 31 1999 to March 31 2022, S&P’s researchers found the S&P High Yield Dividend Aristocrats outperformed the S&P Composite 1500 and S&P 500 High Dividend Index by an average of 140 bps per month and 49 bps per month, respectively. 

The index also outperformed in down markets, losing just 2.5% on average in down months for the S&P Composite 1500, outperforming the market by 1.4% in each down month on average.

These numbers confirm the fact dividend growth outperforms on average in the long term. 

They also show us yield only has a very small part to play. What matters is dividend sustainability. Companies with dividend track records stretching back four decades have shown they know how to balance cash returns to investors, capital spending and acquisitions to produce positive returns for all stakeholders. 

The Warren Buffett approach 

Focusing on dividend growth will give a similar return, it’ll just take time. The best example of this in action is Warren Buffett’s investment in Coca-Cola. When he bought the stock (he never buys for income) it had a yield of around 3%. Today, after nearly four decades of consistent dividend growth, his yield on cost stands at over 50%. 

Even today Coke remains a good model of what investors should look for in a dividend growth stock. The company does not require much capital spending each year as most of its production is outsourced to bottling companies (the likes of Coca-Cola HBC (LSE: CCH). Meanwhile, it can raise prices every year due to its strong brand loyalty and has a highly diverse product portfolio. 

Over the past decade, capital spending has ranged from $1.5bn to $2.5bn annually as operating cash flow has increased from $10.5bn to $11bn. This has left plenty of room to return cash to investors via both dividends with any left being returned as share buybacks. 

The dividend growth portfolio 

Buying a portfolio of dividend champions like Coke is a good way to build a dividend growth portfolio, but, as I noted at the beginning of this article, investing is hard and picking stocks is even harder. 

That’s why I’d choose to go with a fund specialising in quality income stocks. On the passive front, there’s the SPDR® S&P US Dividend Aristocrats ETF listed in both pounds and US dollars. There’s also the SPDR® S&P UK Dividend Aristocrats ETF (UKDV). 

Then on the active side, there’s a range of investment trusts that fit the bill. Finsbury Growth & Income (FGT) has a focused portfolio of businesses that dominate their respective sectors, with pricing power and robust cash flows to support their dividends. STS Global Income & Growth (STS) has a wider, more international portfolio of income plays. A little over a third of the portfolio is invested in the UK, with 56% invested in US equities.

Scottish American Investment Company (SAINTS) has less exposure to the US (35%) and its largest holding is Novo Nordisk. It also has a small allocation to corporate bonds and infrastructure trusts. 

JPMorgan Global Growth & Income (JGGI) has by far the best track record when it comes to creating value for investors. It targets a dividend of 4% of capital each year, funded with both capital gains and income, so it doesn’t focus purely on income stocks. It can buy growth stocks as well and trims these holdings to fund its dividends. A truly growth-focused fund with income as a second thought. 

Dividend stocks have underperformed in 2023, but investors shouldn’t give up on income stocks in their portfolio, according to Morningstar. 

Over the long run, income stocks can still yield a valuable contribution to a portfolio. However, investors need to look for durable dividends, according to Morningstar.

“It’s really critical to be selective when it comes to buying dividend-paying stocks and chasing yield,” Dan Lefkovitz, a strategist for Morningstar Indexes, says in a report.

“Looking for the most yield-rich areas of the market can often lead you into troubled areas and dividend traps — companies that have a nice-looking yield that is ultimately unsustainable. You have to really screen for dividend durability, reliability going forward,” Lefkovitz adds.

Could higher interest rates hurt the outlook for dividend stocks?  

It is investing 101: when interest rates go up, equities tend to struggle. 

Income stocks, in particular, tend to struggle more than most. 

Higher rates lift yields on bonds and cash deposits, making dividends less attractive for income investors. 

That’s the theory anyway. In practice, interest rates have an unpredictable impact on dividend stocks.

Morningstar Indexes have looked at the performance of dividend-paying stocks under different rate regimes across several equity markets. It found no clear relationship between interest-rate regimes and the performance of dividend payers in Australia, Germany, Japan, the United Kingdom, or the United States.

Lefkovitz believes it’s not worth putting much emphasis on rates when it comes to income-focused investing. “It’s really more about what has been in and out of favour in the equity market,” he says.

All about the tech

The dividend slump is more a reflection of the narrow rally in equity markets, which are being driven higher by US tech names. 

“The big winners this year haven’t been the dividend champions,” says Lefkovitz.

Through the first half of 2023, nearly three quarters of the gains in the Morningstar US Market Index came from the very largest technology stocks: Apple, Microsoft, Nvidia, Amazon.com, Meta Platforms, Alphabet, and Tesla - none of which qualify as dividend champions. 

“Companies perceived to be benefiting from AI have soared, including many of the largest public companies in the US (and the world). Nvidia, a semiconductor-maker seen as a key supplier for the AI boom, is the foremost example—like many of the largest stocks in the market, it's not exactly dividend rich,” Lefkovitz says. 

Among the highest-quality dividend stocks, only 4.8% come from the technology sector, according to Morningstar figures.  By comparison, the technology sector accounts for 28.4% of the US equity market. 

 Dividend Doldrums

Underperforming banks, biopharma and energy stocks have also held back the dividend-paying section of the market.

In financial services, a spate of bank failures has shaken confidence in the sector. Truist, a Dividend Yield Focus Index constituent, has seen its share price decline 27% this year. Elsewhere, Bank of America, USBancorp and PNC Financial Services, all members of the Morningstar US Dividend Growth Index, have lagged behind the rest of the market. 

In the energy sector, Dividend Yield Focus Index constituents ExxonMobil, Chevron, and Pioneer Natural Resources are all in negative territory for the first half of 2023. 

In healthcare, biopharma stocks that have not benefited from the weight-loss drug craze have generally been out of favour in 2023. Pfizer and AbbVie, constituents of both Dividend Yield Focus and Dividend Growth, are coming down from COVID highs and are facing competitive pressures, according to the Morningstar report.

“The good news is that a lot of dividend-rich areas of the market are attractively valued right now—financial services and healthcare among them,” Lefkovitz says. 

The outlook for dividend stocks is strong

Longtime dividend investors know periods of underperformance are part of life. 

And it would be tempting for cautious investors to ditch their dividend-paying stocks in favour of the safety of a high street savings account now. In the past, investing in fast-growing stocks has been far more appealing. So why make a case for dividend stocks?

“Dividend-paying stocks can boast a strong long-term track record,” says Lefkovitz, adding that “dividend-payers have outperformed the broad equity market.”

Dividend-paying stocks have underperformed for stretches before. However, “resilience during downturns sets them up for long-term success,” says Lefkovitz. 

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At first glance, UK housebuilders Persimmon, Taylor Wimpey and Barratt Developments may appear to be some of the best dividend stocks around. They offer high historic dividend yields that, aside from a period of uncertainty prompted by the pandemic, have been relatively robust over recent years.

However, with their financial prospects widely expected to come under pressure in the year ahead due to the impact of rising interest rates on housing affordability, their dividend payouts may decline. We consider whether these housebuilder stocks can deliver on dividend yields?

You can also read about the highest dividend yields in the FTSE 100 in our article.

The qualities to look for in dividend stocks

The high historic yields and a solid track record of dividend payouts are only two criteria that investors should seek when purchasing income stocks.

The affordability of dividend payments, assessed through the dividend coverage ratio, is also crucial because it provides guidance on the sustainability of shareholder payouts. For example, a housebuilder with dividend cover of two, which means dividends could be paid twice using net profits, is likely to be a far more attractive income investing proposition than a rival which can only afford to pay them once using net profits. The latter’s dividends are more likely to fall should net profits come under pressure, for instance.

The volatility of a company’s earnings is also important to consider when assessing dividend stocks. A cyclical business that is highly dependent on the performance of the wider economy is likely to offer less stable dividend payouts than a firm with defensive characteristics. Since housebuilders are cyclical firms, their profits are likely to fluctuate depending on the economic outlook. Indeed, with the UK widely expected to experience a recession this year as interest rates rise, their earnings and dividend prospects have moved sharply into focus.

Can investors trust Persimmon’s dividend?

Persimmon announced major changes to its dividend policy in November in response to tougher trading conditions. Having successfully implemented a capital return programme between 2013 and 2022 that paid a total of 1535p per share in dividends, the firm will now follow a capital allocation policy that prioritises its financial position during a challenging period for the housebuilding sector.

For example, ordinary dividends will be set at a level that means they are well covered by net profits. This will enable the company to reinvest for future growth, notably through the acquisition of land at potentially lower prices during a period of falling asset prices. Any excess capital generated during a period of economic recovery will be returned to shareholders in the form of special dividends or a share buyback.

While Persimmon’s revised payout policy represents a major change that may erode investor trust in its income prospects, it does not necessarily make the company a less attractive dividend stock. Rather, it means the firm is realistic about the fact that its operating conditions have deteriorated over recent months and its previous dividend policy has therefore become unaffordable.

Its short-term dividend payouts are likely to be lower than those of the recent past on a per share basis. However, over the long run, its new policy is likely to aid the firm’s financial prospects and boost its capacity to raise shareholder payouts as the economy recovers. Further details on its dividend policy are set to be included in full-year results scheduled for release on 1 March.

What is Taylor Wimpey’s sustainable dividend yield?

Taylor Wimpey has also proved to be a relatively attractive dividend stock over recent years. Its dividend policy comprises a payout that is made throughout all market conditions, which provides a degree of stability for income-seeking investors. In addition, the firm aims to pay surplus cash to shareholders as and when buoyant trading conditions provide a boost to its bottom line.

Overall, the firm aims to pay twice-yearly dividends that together amount to around 7.5% of its net assets. While generous, given that 7.5% of its net asset value per share currently equates to a dividend yield of 7.4%, ultimately market conditions will determine whether the company’s present dividend policy is sustainable.

Indeed, dividends are funded by net profits. If a housebuilder, or any other firm, experiences a decline in profitability, its dividends will either need to be reduced or funded by existing cash reserves or debt. Although Taylor Wimpey has a net cash position of £864m, and could subsidise a profit shortfall to maintain dividends, its profitability will determine the level of dividend that is sustainable in the long run.

With the firm’s earnings per share forecast to fall to 10.3p next year, last year’s dividend of 8.28p per share is set to remain affordable. However, with an uncertain operating environment ahead, it would be unsurprising for dividend payments to be moderated to a level that is more sustainable. Further details on its dividend policy are expected to be included in full-year results scheduled for release on 2 March.

Will Barratt Developments meet analyst dividend forecasts?

Barratt Developments is another dividend stock that has been popular among income-seeking investors. The firm altered its dividend policy at the end of the 2022 financial year so that, while shareholder payouts were covered 2.25 times by net profits last year, they will be covered twice by net profits this year. It then plans to reduce dividend cover to 1.75 times in 2024.

While this would normally mean greater dividends, a tough operating environment that is forecast to prompt lower earnings means that dividends per share are set to decline. It is forecast to pay a dividend of 33.6p per share in the 2023 financial year, followed by dividends of 24.1p per share in the 2024 financial year. As a result, it trades on a forward yield of 5.2%.

Although the company has a degree of headroom when making dividend payments, an ongoing downturn for the housing market means its near-term financial future is highly uncertain. Investors, therefore, may need to accept that there is an elevated chance of the firm failing to meet current dividend forecasts as rising interest rates and falling house prices lead to a decline in its profitability.

Are these dividend stocks worth buying?

Although Persimmon, Taylor Wimpey and Barratt Developments face a tough near-term outlook, they remain attractive dividend stocks for the long run. Factors such as a longstanding imbalance between housing supply and demand, as well as a likely decline in the rate of inflation this year that moderates interest rate rises, mean the prospects for housebuilders remain upbeat over the coming years.

Unlike in recent years, though, dividends across the sector are likely to fall before they rise. This means that investors should ensure they diversify across different sectors and do not rely on a small number of housebuilders for their dividend income.