The Income Investor: outlook for cash and dividends in 2026
Analyst Robert Stephens remembers the year’s big events for income seekers and looks at the best strategy to generate attractive capital returns and inflation-beating dividend growth over the next 12 months.
31st December 2025 12:34
by Robert Stephens from interactive investor
Interest rate cuts changed the income investing landscape during 2025. While the current era of monetary policy easing began in 2024, with interest rates cut by 50 basis points last year, its momentum sharply gathered pace in 2025. Indeed, interest rates were cut on four occasions this year so that Bank Rate fell by 100 basis points to 3.75%.
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Mixed results
Clearly, this was bad news for income seekers who have cash savings. A decline in Bank Rate was at least partly passed on to savers in 2025, with the income return from easy-access savings accounts gradually falling during the year, so that it typically stood at little more than 4% by its end.
Monetary policy easing, of course, provided support to bond prices during the year given their inverse relationship with interest rates. The yield on 10-year gilts, for example, moderated by 10 basis points to 4.5% year on year. But its performance was also impacted by wider economic developments in what proved to be a relatively uncertain and volatile year, particularly in the run up to the widely anticipated Autumn Budget.
A positive influence
The stock market, meanwhile, experienced wild swings during April as US tariff announcements prompted a sharp deterioration in investor sentiment. The FTSE All-Share index, for instance, slumped by 10% during the first half of April before rapidly recovering in the following weeks.
Overall, income investors who held FTSE All-Share-listed equities, which have an inherent international bias, benefited from interest rate cuts not just in the UK but also in other developed economies such as the US and the eurozone.
Widespread monetary policy easing contributed to an 18% rise in the index during the 12-month period, reaching several new record highs as investor sentiment improved. This resulted in the index’s dividend yield amounting to roughly 3.2% by the end of the year, below the income return available from easy-access cash savings and 10-year gilts.
Tough operating conditions
Clearly, interest rate cuts implemented in the UK during 2025 have not yet had their full impact on GDP growth due to the existence of time lags. The economy expanded by just 0.3% in the second quarter and by 0.1% in the third quarter of the year, for example. Similarly, the UK unemployment rate rose to its highest level since March 2021 when it reached 5.1% during October 2025 as the economy’s performance stagnated.
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As a result of a tough economic environment, UK-focused firms experienced challenging trading conditions for much of the year that were not conducive to rapid profit growth. In many cases, this limited their capacity to raise dividends at a brisk pace – particularly as fiscal policy changes and uncertainty ahead of the Autumn Budget prompted a relatively cautious attitude across cyclical sectors.
Real-terms growth
Although economic conditions elsewhere were much more positive, notably in the US where the economy expanded at an annualised rate of 3.8% in the second quarter following a brief contraction in the prior quarter, sticky inflation meant that it was ultimately tough for dividend growth to outpace the rate of annual price rises.
In fact, UK inflation was higher during 2025 than in the previous year, rising from 2.5% in December 2024 to peak at 3.8% between July and September 2025 before moderating to 3.2% in November. As a result, income seekers who held dividend stocks may have struggled to generate a significant increase in their spending power over the past 12 months.
Yield (%) | ||||||||||||||
Asset | Current | 03-Dec | Change (Nov-current) % | 18-Nov | 07-Oct | 09-Sep | 22-Aug | 08-Jul | 06-Jun | 14-May | 08-Apr | 12-Mar | 11-Feb | 15-Jan |
FTSE 100 | 3.02 | 3.14 | -3.8 | 3.15 | 3.27 | 3.27 | 3.23 | 3.45 | 3.42 | 3.55 | 3.98 | 3.63 | 3.50 | 3.73 |
FTSE 250 | 3.51 | 3.83 | -8.4 | 3.88 | 3.45 | 3.79 | 3.72 | 3.78 | 3.83 | 3.89 | 4.51 | 3.97 | 3.75 | 3.99 |
S&P 500 | 1.39 | 1.38 | 0.7 | 1.42 | 1.40 | 1.44 | 1.45 | 1.49 | 1.57 | 1.60 | 1.82 | 1.64 | 1.52 | 1.56 |
DAX 40 (Germany) | 2.39 | 2.47 | -3.2 | 2.48 | 2.37 | 2.43 | 2.39 | 2.4 | 2.37 | 2.42 | 2.86 | 2.63 | 2.59 | 2.75 |
Nikkei 225 (Japan) | 1.53 | 1.55 | -1.3 | 1.53 | 1.55 | 1.70 | 1.73 | 1.86 | 1.94 | 1.89 | 2.19 | 1.86 | 1.75 | 1.75 |
UK 2-yr Gilt | 3.75 | 3.740 | 0.3 | 3.785 | 3.993 | 3.928 | 3.977 | 3.876 | 4.030 | 3.979 | 3.964 | 4.163 | 4.156 | 4.498 |
UK 10-yr Gilt | 4.519 | 4.442 | 1.7 | 4.531 | 4.719 | 4.630 | 4.752 | 4.629 | 4.626 | 4.672 | 4.586 | 4.678 | 4.475 | 4.817 |
US 2-yr Treasury | 3.507 | 3.502 | 0.1 | 3.560 | 3.576 | 3.511 | 3.706 | 3.913 | 3.945 | 4.000 | 3.769 | 3.937 | 4.279 | 4.356 |
US 10-yr Treasury | 4.165 | 4.083 | 2.0 | 4.096 | 4.121 | 4.070 | 4.300 | 4.421 | 4.410 | 4.469 | 4.185 | 4.272 | 4.515 | 4.774 |
UK money market bond | 4.09 | 4.09 | -100.0 | 4.11 | 4.10 | 4.27 | 4.27 | 4.35 | 4.46 | 4.53 | 4.53 | 4.65 | 4.80 | 4.80 |
UK corporate bond | 5.00 | 4.96 | -100.0 | 4.96 | 5.13 | 5.71 | 5.71 | 5.81 | 5.74 | 5.63 | 5.65 | 5.69 | 5.71 | 5.74 |
Global high yield bond | 6.40 | 6.43 | -100.0 | 6.54 | 6.55 | 6.60 | 6.60 | 6.58 | 6.54 | 6.34 | 6.55 | 6.52 | 6.63 | 6.66 |
Global infrastructure bond | 2.24 | 2.21 | 1.4 | 2.19 | 2.17 | 2.26 | 2.21 | 2.22 | 2.24 | 2.24 | 2.32 | 2.27 | 2.34 | 2.42 |
SONIA (Sterling Overnight Index Average) | 3.7264 | 3.9702 | -6.1 | 3.9694 | 3.9672 | 3.9671 | 3.9673 | 4.2173 | 4.2111 | 4.2103 | 4.4554 | 4.4548 | 4.4544 | 4.7000 |
Best savings account (easy access)* | 4.5 | 4.51 | -0.2 | 4.51 | 4.80 | 4.80 | 4.84 | 5.00 | 4.75 | 5.00 | 5.00 | 5.00 | 5.00 | 5.00 |
Best fixed rate bond (one year) | 4.51 | 4.55 | -0.9 | 4.40 | 4.45 | 4.50 | 4.43 | 4.58 | 4.45 | 4.52 | 4.70 | 4.58 | 4.75 | 4.77 |
Best cash ISA (easy access)* | 4.52 | 4.52 | 0.0 | 4.56 | 4.51 | 4.40 | 4.70 | 4.98 | 4.85 | 4.83 | 5.92 | 5.00 | 5.03 | 5.05 |
Source: Refinitiv as at 22 December 2025. Bond yields are distribution yields of selected Royal London active bond funds (as at 30 November 2025), except Royal London Corporate (as at 22 December 2025) and global infrastructure bond which is 12-month trailing yield for iShares Global Infras ETF USD Dist as at 19 December. SONIA reflects the average of interest rates that banks pay to borrow sterling overnight from each other (18 December). Best accounts by moneyfactscompare.co.uk refer to Annual Equivalent Rate (AER) as at 22 December. *Includes introductory bonus.
A looser monetary policy
The Bank of England now expects inflation to fall close to its 2% target during the second quarter of 2026. This should make the task of obtaining an increase in spending power much easier vis-à-vis the past year for income investors who hold dividend stocks.
A lower rate of inflation, when combined with an unemployment rate that the Bank of England expects will remain at roughly 5% during 2026, should also provide greater scope for the central bank to further cut interest rates. Although the pace of monetary policy easing may naturally slow in 2026, given that Bank Rate has already fallen by 150 basis points in the past 16 months, it would be wholly unsurprising for additional interest rate cuts to be implemented over the next 12 months.
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Differing outlooks
An increasingly loose monetary policy is clearly going to hurt income seekers who rely on the interest obtained from cash savings accounts. Although falling interest rates should offer further support to bond prices during 2026, the fixed nature of their income means that their holders are set to also experience a decline in their spending power despite the near-term prospect of inflation being close to the Bank of England’s 2% target.
Lower interest rates, in contrast, are likely to act as a further stimulus for dividend stocks – both in terms of their price levels and income stream. A looser monetary policy should prompt improved investor sentiment as stock market participants look ahead to the potential positive impact of interest rate cuts on employment levels, wage growth and, crucially, GDP growth. This may prompt a further squeeze on the FTSE All-Share index’s dividend yield during 2026.
Dividend growth prospects
Clearly, interest rate cuts enacted in the coming months are unlikely to have a major impact on the economy throughout 2026 due to time lags. However, the 150 basis points of cuts to Bank Rate enacted since August 2024 should stimulate the operating environments of UK-focused firms over the coming year, providing scope for a faster rate of profit growth that catalyses their dividend payments.
When combined with a potentially more modest rate of inflation in the coming year, this could mean that investors who hold dividend shares enjoy a more attractive real-terms rise in their income over the coming 12-month period. Given that the FTSE All-Share index is internationally biased, the impact of recent US and eurozone interest rate cuts could also be felt in its performance and in the dividend growth rate of its members.
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As a result, continuing to hold a diverse range of high-quality UK-listed dividend stocks could prove to be a sound move in 2026. While their income return may be less appealing than that of cash and many fixed-income securities at present, an evolving monetary policy, falling inflation and an improving economic outlook mean they appear to offer relatively favourable income investing prospects.
Risk/reward
Clearly, there is scope for further volatility in the stock market’s performance during 2026. As per 2025, geopolitical risks remain elevated. For example, the full impact of higher import tariffs on the world economy’s growth rate has arguably not yet been fully felt. And with the potential for an escalation in conflict in Europe and the Middle East, for instance, it would be unsurprising if investor sentiment changes rapidly without warning at times over the coming months.
As such, income seekers who hold dividend stocks should continue to focus on those firms that have the financial strength and competitive position to overcome periods of heightened economic uncertainty. Moreover, buying them at an attractive price, while now more challenging following the FTSE All-Share index’s recent rise, provides a margin of safety in case of a temporary decline in stock market sentiment.
By implementing such a strategy, income seekers are likely to be well positioned to obtain attractive capital returns and, perhaps more importantly, inflation-beating dividend growth in 2026 and over the coming years.
Robert Stephens is a freelance contributor and not a direct employee of interactive investor.
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