How we navigate the UK market’s dividend danger

Rebecca Maclean, manager of Dunedin Income Growth Ord (LSE:DIG) Investment Trust, explains that when looking under the hood, a large proportion of the UK stock market’s dividends are concentrated in a small number of stocks and sectors. Maclean explains how she navigates this risk by focusing on companies demonstrating greater income resilience.

She also explains why she’s optimistic about performance improving versus the wider market in the coming years. 

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Kyle Caldwell, funds and investment education editor at interactive investor: Hello and welcome to our latest Insider Interview. Today in the studio I have with me Rebecca Maclean, manager of the Dunedin Income Growth Investment Trust. Rebecca, thanks for your time today.

Rebecca Maclean, manager of Dunedin Income Growth: It’s a pleasure to be here again. Great to see you.

Kyle Caldwell: So, Rebecca, we’re heading into 2026, what would you say is the biggest reason to be fearful and the biggest reason to be cheerful for investors this year?

Rebecca Maclean: Well, it’s been a good year for performance if you look across global markets generally. They performed strongly, but it has been driven by a narrow set of companies, and I think there’s increasing investor concerns around pockets of the market, particularly in the US, in terms of the level of concentration in that market.

So, I think that’s something that there’s more concern around with investors, and that potentially is something to be fearful of.

In terms of what to be cheerful about, I look at the portfolio and I feel very positive about the prospects for the companies in the portfolio. There are companies which haven’t enjoyed the rally that we’ve seen in markets and that have been left behind, and overlooked. I think there are some great opportunities there.

A company like RELX (LSE:REL), which has sold off around concerns around AI disintermediation, but, actually, the company is harnessing the power of AI to improve the value of its product, save time for its clients like lawyers, and I think that’s not appreciated by the market.

Other aspects looking at the portfolio, there are lots of different idiosyncratic investment cases within there. A company like Haleon (LSE:HLN), which is transitioning from being within a pharmaceutical business to being a consumer health business, that provides the potential for the company to unlock value by changing the way that it operates.

So, we’re looking for those types of investment cases where these are quality businesses exposed to attractive markets with strong market positions and strong management teams, which will allow the companies to navigate through uncertainty to deliver attractive total return from this point forwards. I feel pretty optimistic about the portfolio and where we’re positioned today.

Kyle Caldwell: When it comes to dividends, when you’re looking for opportunities across the market, are there any sectors or types of companies in which you think dividends are looking particularly vulnerable in 2026?

Rebecca Maclean: It’s a good question. The UK market’s known for its dividend paying, but, actually, if you look under the hood, the dividends paid by the UK market are in a handful of companies and are highly concentrated. So, 40% of the dividends paid last year were in banking, mining and energy, and these are typically cyclical sectors, which are dependent on external factors like interest rates or commodity prices.

If you look at the track record of the dividend payments of the UK market, again, it’s quite patchy. In the top eight dividend payers last year, five of them have cut their dividends in the last 15 years. So, I do fear that the dividend yield on the market is probably more risky than people expect.

So, what do we do? We’re looking for resilient income. We’re looking for companies where we’ve got a high level of confidence that the company can continue to pay that dividend because they’ve got strong financials, cash flows to back them up, and healthy balance sheets. And this translates into a more resilient income stream from the portfolio.

If we look back at Covid, which was the last time we had a bear market, the dividend payments of the UK market fell about 30%. The dividends paid on the portfolio for Dunedin Income Growth fell 10%. So, it’s demonstrating a greater resilience, and I think being really cognisant of the concentration of where the dividends are coming from, and just making sure you’re not over-reliant on a particular sector, theme, commodity or interest rate. That’s the way that you can smooth those dividend payments and make sure that they are more resilient through the cycle.

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Kyle Caldwell: For investors who have just simply owned the market, the FTSE All-Share year-to-date has had a good year. How would you convince investors to back your strategy? And it has been a tricky period of performance against that index over one, three, and five years, could you talk through that?

Rebecca Maclean: Yes. So, the UK market’s performed well this year, and Dunedin Income Growth has lagged the market. The reason for this is more about things that we’ve not owned rather than things that we have owned.

The UK market has performed well, but it’s been concentrated in a handful of sectors. The banking sector has done very well, aerospace and defence, and so has tobacco.

But when we look forward from this point, I feel good about the prospects because not owning those sectors that have performed well, they’re not necessarily going to perform well in the future. For example, the banking sector has performed very well, but it’s re-rated from a 30% discount to book value to a 30% premium, which has been a material re-rating. And if we think that interest rates have peaked, then that tailwind from an earnings perspective from interest rates is probably not as strong going forward.

Similarly, for the aerospace and defence sector, it’s up 85% in the last year. This is on anticipation of greater budgets investing in defence assets. There’s a question mark about whether those earnings will actually come through.

So, the sectors that we’ve not owned have performed well, and that accounts for some of the underperformance. From where we stand today, I would be looking at those assets that have been left behind and, for me, the quality aspects of the market, quality companies, have been under-appreciated and haven’t enjoyed that rally.

Also small and mid-cap companies. The returns of the FTSE 100, which are the largest businesses, have outperformed the mid-cap index, the FTSE 250, materially this year. Those mid-cap businesses historically have grown their earnings faster than the large caps because they are more typically in more mature markets too.

So, I would be looking at quality and also mid cap, and that’s how we’re positioned in the portfolio when we look ahead to see how we think the market will perform going forward.

Kyle Caldwell: The UK market’s been described as cheap for many years. It’s had a strong showing in 2025. Is the UK market still cheap? Are you still finding plenty of opportunities?

Rebecca Maclean: The market has re-rated from highly discounted levels where it was trading below its historic price/ earnings (PE). So, it’s re-rated to about 13.5 times PE ratio. It’s still cheap versus other markets, but it’s not as cheap as it was.

But, as I said, it is concentrated in a handful of stocks, and if you look under the hood, there are still areas in the market which I think are unloved and a fantastic hunting ground for investors looking to invest in the UK.

Quality as a factor has underperformed value as a style materially in the last year and three years. So, those quality businesses, these are companies which deliver resilient growth, they’ve got strong balance sheets, they’ve got competitive moats, and those companies have been left behind. So, I think that’s an exciting area of the market to look at.

Also mid-caps and small caps too. The UK market has persistent outflows, and that has impacted those smaller businesses because there’s less liquidity in those names too. So, I’d be looking at the mid- and small-cap sector.

And also the UK as well. The UK cyclical businesses are still close to trough. So, I’d think about the housebuilding sector; we own Taylor Wimpey (LSE:TW.). We also own Genuit Group (LSE:GEN), which makes plastic pipes that go into residential, but also commercial, buildings and also around climate management systems as well.

These businesses are trading towards the trough of their cycle in terms of volumes and so there’s potential there for a cyclical recovery in some of those domestic cyclical businesses as well, which we have exposure to.

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Kyle Caldwell: In terms of the wider macroeconomic backdrop, how does that fit into your stock picking? And when you have an event that’s pretty left field, like US tariffs, how do you navigate that risk?

Rebecca Maclean: We’re able to leverage the economics team at Aberdeen. We have a macroeconomic team of experts and they provide timely research on all these factors and they provide forecasts around GDP and inflation, interest rates too. So, we’re able to consider that and integrate that from a top-down perspective in our analysis.

But we spend a lot of time on the bottom up. We spend a lot of time speaking to the companies about what they are seeing, what are those leading indicators that they are looking for, and how can they manage those risks.

In the example of tariffs, it was quite a shift in terms of sentiment and narrative for businesses. We spoke to our businesses to understand where are they facing the tariffs and what can they do to mitigate those tariffs? In some situations, it came down to how strong their ability was to pass that price on.

In other situations, there was competitive advantage. We own Volvo AB Class B (OMX:VOLV B) in the portfolio, which has its operations in the United States, while its competitors have operations in Mexico. It is seeing market share gains from that perspective too.

So, it really comes down to understanding the fundamentals of the businesses that we invest in and then looking for investment cases where we feel these are the quality businesses which can deliver attractive, total-return resilient income that we think are under-appreciated by the market.

Kyle Caldwell: Finally, do you have skin in the game?

Rebecca Maclean: Yes, I do. I own shares in Dunedin Income Growth Investment Trust. I also own it in my Junior ISAs for my two small children as well. So, absolutely.

Kyle Caldwell: Rebecca, thank you for your time today.

Rebecca Maclean: Thank you for having me.

Kyle Caldwell: That’s it for our latest Insider Interview. I hope you’ve enjoyed it. For more videos in the series, do hit that subscribe button and I’ll hopefully see you again next time.