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.
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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.
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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.
