Should you invest in UK dividend stocks?

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.

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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.