Dividend growth likely to slow this year – are UK income stocks still worth buying?

UK equities have long been popular with income investors. But as the economic outlook deteriorates, dividend growth is likely to slow. Can you still find good yields?

Elevated view of London's financial district at night.
(Image credit: John Lamb via Getty Images)

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? 

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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:

Swipe to scroll horizontally
CompanyProspective yield in 2024
Phoenix Group Holdings11.17%
Vodafone Group10.78%
British American Tobacco10.29%
HSBC Holdings9.40%

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.

Katie Williams
Staff Writer

Katie has a background in investment writing and is interested in everything to do with personal finance and financial news. 

Before joining MoneyWeek, she worked as a content writer at Invesco, a global asset management firm, which she joined as a graduate in 2019. While there, she enjoyed translating complex topics into “easy to understand” stories. 

She studied English at the University of Cambridge and loves reading, writing and going to the theatre.