The dividend trend getting more traction

UK dividends showed signs of recovery in the last quarter of 2025, although the expectation is for only modest further improvements in the coming year.

Payouts from UK-listed shares rose by 1.3% on a headline basis to £14.3 billion in the fourth quarter of the year.

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The latest edition of Computershare’s UK Dividend Monitor report noted that this was the only quarter of the year to see headline growth as well as “the fourth consecutive quarter of improvement from a particularly weak Q1 onwards”.

The fourth quarter came with better-than-projected payouts because of a late surge in special dividends, a weakening of the pound in October and November (meaning dividends in other currencies were worth more pounds) and the resilience of regular dividends.

On a sector basis, the industrial goods and support sector made the strongest contribution to 2025’s dividend growth, thanks largely to Rolls-Royce Holdings (LSE:RR.) and BAE Systems (LSE:BA.).

Financials, and insurers in particular, were also key contributors, while healthcare, utilities and basic consumer goods companies also delivered “encouraging growth”.

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But a large cut from Vodafone Group (LSE:VOD), as well as continued reductions in the mining sector and from housebuilders, ate into dividend growth.

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

“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.”

Large caps versus mid caps

We recently noted something of a regime change for UK income funds, with those that focus on small and mid-cap shares fighting for space in the list of top payers for 2025.

That comes against a backdrop of especially strong total returns from large caps, and below we touch on how different funds have fared when it comes to both income and total returns.

Computershare pointed to the same trend in the underlying market, noting that the FTSE 250 had enjoyed underlying dividend growth of 5.4% versus 3.4% for the FTSE 100.

One drag on dividend growth for blue-cap shares (and some others) has come in the form of prolific share buybacks. As the name suggests, this involves a company purchasing some of its own shares on the market. This reduces the numbers of shares available and automatically boosts the company’s earnings per share figure. 

Companies have been especially active on this front while share prices have been low. UK buybacks reached almost £64 billion in 2025, more than double the level for 2019.

Dividends have fallen by 13% in the same period, with buybacks slowing dividend growth by 3% a year since 2019 “by diverting cash to repurchases rather than distributions”.

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Such trends are likely to continue over the next year, with Computershare noting that there were relatively few major growth engines to drive dividends higher in 2026.

“Declines in mining payouts are likely to slow further or stop altogether, banks are likely to continue to deliver modest growth and energy payouts are likely to be flat,” the report said.

“Across the wider market, we project steady, low single-digit growth. Meanwhile, the dampening effect from share buybacks and the strong pound are set to continue (if sterling maintains its current rate), although the exchange rate effect will weaken as the year progresses.”

Funds for income investors

As we noted last week, a variety of funds stand out when it comes to the income generated in 2025. Funds that sell option overlays to boost their income continue to stand out here, with Schroder Income Maximiser Z Inc topping the table. 

That fund has fared well by total returns too, making around 22%. But such portfolios, by offering option overlays, participate less in rising markets than they could, hitting total returns.

As such, it’s worth noting that the Fidelity and Premier Miton funds, which also take a so-called enhanced income approach, lag some of their peers by overall performance.

As noted, funds with a focus on small and mid-cap shares have a strong presence in this list, from Chelverton UK Dividend Trust Ord (LSE:SDV) to Aberdeen Equity Income Trust (LSE:AEI), Slater Income P Inc, Man Income Professional Inc D and those with “multi cap” in the name.

Source: FE. Based on income payments over the course of 2025, had £10,000 been invested on 27 December 2024. All data as at 20/01/2026

If multi-cap funds look good on the income front, portfolios with a focus on bigger companies have tended to lead the way by total returns.

The top performers over the 12 months to 27 January 2026 are Temple Bar Ord (LSE:TMPL) with a 45.7% return, Lowland Ord (LSE:LWI) and Shires Income Ord (LSE:SHRS) with gains of roughly 40%, Aberdeen Equity Income Trust (LSE:AEI) on around 38% and City of London Ord (LSE:CTY) on around 33%.

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Investors do therefore need to consider the balance of income versus growth, and whether it makes sense to hold a multi-cap fund alongside a large-cap option.