High-yielding shares beyond the FTSE 100 that the pros are backing

Smaller companies are typically viewed as growth stocks with the potential for decent long-term capital appreciation, while large companies – particularly in the more developed sectors – are often relied on for their stable dividends.

However, this notion was turned on its head earlier this year when the average dividend yield – how much a company pays out in dividends annually relative to its share price – among UK mid-caps and small-caps surpassed that of firms in large-cap index the FTSE 100.

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For the past 15 years, the FTSE 100 index has offered on average a 20% higher dividend yield compared to the mid-cap focused FTSE 250, reflecting the modest valuations in the blue-chip index as well as its bias towards mature industries such as oil and gas, mining, and banking, says Rebecca Maclean, co-manager of Dunedin Income Growth Ord Investment Trust. But the outperformance of UK large‑cap companies relative to their mid‑cap peers in recent years has reversed this relationship.

“Five of the eight largest payers in the FTSE 100 have cut their dividend at least once over the past 15 years and total FTSE 100 payouts have shown little growth since 2014, meaning the FTSE 250 now offers a higher dividend yield,” Maclean says.

Figures sourced by Aberdeen Investments show companies in the bottom 10% of the UK market by capitalisation were yielding 3.4% on average in January, compared to the 3% dividend yield of UK large caps.

Weak investor sentiment may have weighed on smaller companies’ performance, but there are also positive reasons for the surge in dividend yields; namely greater capital discipline among smaller companies and businesses focusing on rewarding shareholders.

Richard Marwood, head of UK and European equities at Royal London Asset Management, says “dividend yield is a function of two things – the level of dividends that a company is paying, but also the share price.”

Dividend yield is one measure of valuation

Marwood adds: “With UK mid and small caps still out of favour with investors, many share prices are relatively depressed, but the companies may still be well placed to pay their dividends, providing yield-hungry investors with opportunities.”

Aberdeen’s Abby Glennie, manager of Aberdeen UK Smaller Cos Growth Trust plc, suggests dividend yield is just one part of the investment case proposition.

“Dividend yield is an interesting aspect but it can’t be viewed in isolation and doesn’t necessarily make one business more attractive as an investment than another,” she says. “Many companies may be investing for growth and therefore not paying dividends.”

However, dividends are an important part of a total return view, Glennie adds.

“Investors can use dividend yield as one measure of valuation when considering the investment case if they are confident that the dividend is secure.”

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Before investors dive into dividend-paying stocks it’s important to remember that dividends are often discretionary payments and are dependent on companies having sufficient profit or retained earnings to pay them. One way to check this is to look at a company’s dividend cover by earnings.

“High yields can be a sign of shares that are good value, or a red flag that a company might need to cut its dividend,” Marwood says. “As an income-focused investor, it is important to assess companies to make sure you are invested in the former rather than the latter.” 

Maclean agrees. “Ultimately, dividend sustainability matters more than headline yield for investors seeking long-term returns. By focusing on earnings resilience, cash generation, balance‑sheet strength and long‑term growth, we continue to find compelling income opportunities beyond the FTSE 100.”

Crucially, Maclean adds, dividends generated by the FTSE 250 are more diversified, spread across companies and sectors including media, real estate, financial services and utilities. One example Maclean holds in Dunedin Income Growth is multi‑utility Telecom Plus, which offers a dividend yield of around 9%.

“Telecom Plus offers an attractive dividend yield backed by resilient cash flows and a capital‑light business model,” Maclean says.

Searching for dependable sources of income

Diversity of income is a key theme for the Henderson High Income Ord trust, a UK-focused multi-cap fund with the flexibility to invest in both fixed-income assets and overseas equities in order to provide a dependable source of income.

Manager David Smith selects Genuit Group and Big Yellow Group as top companies in the mid-cap space, generating annual dividend yields of around 5.1% and 5.6% respectively.

Genuit, which provides plastic piping to the building industry to improve water, climate and ventilation management, has a cash-generative business model that supports an attractive and growing dividend despite the lacklustre end markets, but these should recover at some point, Smith says, while self-storage company Big Yellow benefits from low market penetration, low supply and resilient demand.

“It has a strong brand, well-located estate, high margins and robust balance sheet, while the build-out of new storage sites from its existing pipeline should underpin dividend growth going forward from an already attractive level,” he adds.

Despite the broad range of constituents in the FTSE 250, Chesnara is a name that frequently crops up among managers looking to invest outside the blue-chip index. The financial services business was promoted to the FTSE 250 from the FTSE Small Cap index last year following its acquisition of HSBC’s UK life assurance business, which prompted a 6% increase to its final dividend for its 2025 financial year.

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Dominic Younger, manager of CT UK Capital and Income Ord, an investment trust, says the company offers “a compelling income opportunity within the UK mid-cap space”.

He explains: “The business is led by an experienced management team with a clear specialism in acquiring closed life insurance books, often at sizeable discounts to book value, and managing them to generate predictable, long-term cash flows.

“These are further enhanced through self-help initiatives and a well-established playbook for extracting cost synergies.”

Younger notes that Chesnara has built one of the strongest track records of continuous dividend growth across the UK and European insurance sector. It has a dividend yield of around 7.0%. 

“Looking ahead, we believe there remains significant scope for further dividend-enhancing deals, without stretching the company’s conservatively managed balance sheet,” he adds.

“Competing for deals in a fertile and often overlooked hunting ground, Chesnara continues to find attractive opportunities. It offers a compelling proposition for investors seeking sustainable income beyond the FTSE 100.” 

FTSE reshuffles

The shifting market capitalisations of companies means there are frequent reshuffles between the indices. In another recent rebalancing, pharmaceutical company Hikma Pharmaceuticals was demoted from the FTSE 100 following changes to its market valuation, but with solid dividend cover and a yield of 4.5%, Marwood suggests it is an attractive investment.

Marwood, who manages Royal London Asset Management’s UK Equity Income, UK Dividend Growth and UK Income with Growth funds, also highlights property company NewRiver REIT, a retail-focused Real Estate Investment Trust (REIT), which offers a yield of around 8.9%, and retailer Dunelm Group, which yields around 6% and, Marwood says, has a strong track record of paying additional special dividends periodically.

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For Anthony Lynch, manager of JPMorgan Claverhouse Ord, high-yielding small-caps offer the best of both worlds; yield today and the potential for sustainable growth over time. He picks XPS Pensions Group as a prime example of this; the financial services business combines strong earnings growth with a steadily rising dividend and currently offers a dividend yield of around 4%.

“The company is well positioned to benefit from regulatory changes that are increasing demand for advice from pension schemes, while a shift in the competitive landscape – requiring trustees to retender more frequently – is favouring medium-sized challengers like XPS over larger incumbents,” he says.

“This is already feeding through into earnings coming in ahead of expectations and a growing dividend, highlighting how income in the small and mid-cap space can offer both yields today and the potential for sustainable growth over time.”

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