The Income Investor: a FTSE 100 retailer with dividend appeal

Many income investors instinctively focus on high-yielding dividend shares. After all, such stocks help them meet their primary goal of obtaining a generous income. The FTSE 100’s recent surge to a record high, however, means there are now fewer large-cap stocks offering headline-grabbing yields. Indeed, the index itself now has a rather humdrum income return of 3%.

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Some income investors may also focus on companies that are delivering a rapid rise in dividends. Fast increases in shareholder payouts can, over the long run, more than adequately compensate investors for a relatively modest initial yield. But, again, unearthing such stocks is becoming more challenging. An uncertain economic period means dividend growth can be lacking – especially among UK-focused firms. Furthermore, the FTSE 100’s recent rise means the cost of obtaining rapid dividend growth, in terms of accepting a relatively low yield, has increased.

A revised focus

As a result of a lack of options among high-yielding and/or fast-growing dividend stocks, many income investors may find they end up with a rather limited portfolio in terms of its number of holdings. A highly concentrated portfolio can, of course, equate to relatively high risks as difficulties with a small number of positions have a significant impact on overall performance.

Therefore, it may be prudent for income seekers to consider FTSE 100 stocks that have relatively modest yields and rather lacklustre recent rates of dividend growth but, crucially, offer the potential for shareholder payouts to rise at a brisk pace over the long run. In the coming years, such stocks could deliver a surprisingly strong income return.

In terms of the yields of such companies, a 3-4% income return may not appear to be all that impressive at a time when easy-access cash savings offer an income return in excess of 4%. However, the return on cash savings is likely to fall as the Bank of England continues to implement a looser monetary policy amid a prospective decline in inflation over the coming months. And with the FTSE 100 having the potential to further rise, an initial income return that is in line with the index’s current yield could ultimately be viewed as increasingly appealing over the coming years.

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Interest rate cuts, meanwhile, should have a positive impact on the economy’s performance, thereby providing improved operating conditions for UK-focused firms. And with central banks in the US and the eurozone having also recently implemented a looser monetary policy, FTSE 100 members with exposure abroad are also likely to experience stronger trading conditions once time lags have passed. This could equate to higher profits and stronger dividend growth rates than those recorded in the recent past – especially for highly cyclical firms that have previously struggled to raise shareholder payouts.

Source: Refinitiv as at 16 February 2026. Bond yields are distribution yields of selected Royal London active bond funds (as at 13 February), except the global infrastructure bond which is 12-month trailing yield for iShares Global Infras ETF USD Dist as at 13 February. SONIA reflects the average of interest rates that banks pay to borrow sterling overnight from each other (11 February). Best accounts by moneyfactscompare.co.uk refer to Annual Equivalent Rate (AER) as at 16 February and which exclude bonuses.

Income considerations

Of course, there are no guarantees that a company which has a disappointing recent track record of dividend growth will subsequently deliver rapid shareholder payouts in future. But there are several areas that could provide guidance on the likelihood of this taking place.

Namely, firms that are particularly affected by the economy’s performance and consumer spending power may be impacted to a greater extent than other FTSE 100 companies by falling interest rates. For example, businesses that depend on discretionary, rather than staple, spending may find their trading conditions are more positively impacted by the effects of falling inflation and interest rate cuts on consumer spending.

Similarly, firms that have relatively high dividend cover may be in a strong position to raise dividends at a similar pace to profit growth in future. Depending on their dividend policy, of course, they may be able to maintain their current dividend payout ratio and not be required to improve upon their present financial position.

Furthermore, companies that have a solid balance sheet may be better equipped to rapidly raise dividends amid improved operating conditions. They may not, for example, feel the need to use excess capital to repay loans, using it instead to reward shareholders via a higher dividend payment.

Solid fundamentals

Home improvement retailer Kingfisher (LSE:KGF) is a prime example of a FTSE 100-listed company that has a humdrum yield and a disappointing recent track record of dividend growth. Following a 42% share price rise in the past year, the owner of B&Q and Screwfix now offers an income return of just 3.4%. Furthermore, it left dividends per share unchanged in each of the three financial years to 2025 and in the first half of its most recent financial year.

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Clearly, a lack of dividend growth is highly disappointing for the company’s investors and means they have experienced a decline in their spending power over recent years. However, it has coincided with a highly challenging period for the firm that has seen its earnings per share (EPS) decline by 41% over the three financial years to 2025 in what has been a difficult operating environment.

Still, the company’s dividend remains relatively affordable. In the 2025 financial year, for example, the firm’s net profits covered shareholder payouts around 1.7 times. And with it having a solid financial position, as evidenced by a net debt-to-equity ratio of 31% and net interest cover of 8.5 in the first half of the 2026 financial year, the company appears to be in a strong position to pass long-term profit growth onto investors in the form of higher dividends.

Growth potential

Kingfisher’s focus on home improvement products means it is a highly cyclical business. Many consumers cut back on discretionary spending, including new kitchens, bathrooms and home repairs, that can typically be more easily postponed or avoided altogether during periods where their disposable incomes are under pressure.

While its status as a retailer of discretionary products has weighed on the firm’s financial performance over recent years, given elevated inflation and a weak economic outlook, it could prove to be beneficial in future.

After all, the Bank of England expects inflation to be roughly in line with its 2% target by April, while interest rate cuts should have a positive impact on wage growth. This could equate to greater spending power among consumers that leads to higher demand for the company’s products. And with inflation in the eurozone standing at 1.7% and the full effect of interest rate cuts in the region yet to have been felt due to the existence of time lags, the company’s prospects in other key geographical markets could also improve.

Indeed, Kingfisher’s EPS is expected to have risen by 13% in its recently completed 2026 financial year. Its bottom line is then forecast to rise by 10% in the 2027 financial year. With its financial performance having the potential to further improve in the long run, this could provide scope for a long overdue rise in shareholder payouts over the coming years.

Risk/reward

Clearly, Kingfisher’s financial performance and share price could prove to be relatively volatile. If, for example, the economy’s growth rate disappoints, or inflation remains sticky for longer than anticipated, consumer spending may remain weak and lead to further difficult operating conditions for firms that are reliant on discretionary spending.

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Additionally, the company’s dividend policy is for shareholder payouts to be covered 2.25-2.75 times by profits. Given that the firm’s dividend cover was 1.7 in 2025, this suggests that dividend growth could further disappoint in the short run – even amid a rising bottom line – as it rebuilds dividend cover following its slump in profits over recent years.

In the long run, though, the company appears to be well placed to deliver a relatively attractive income return. Its solid financial position and highly cyclical status amid an improving economic outlook suggest it could prove to be a surprisingly worthwhile income holding over the coming years.  

Robert Stephens is a freelance contributor and not a direct employee of interactive investor.