The Income Investor: why this high-yield FTSE 100 REIT appeals

The FTSE 100’s recent surge to 10,000 points has inevitably squeezed its dividend yield. The index’s income return now stands at a rather humdrum 3.1%, which is unlikely to hold significant appeal for income investors seeking to deploy their hard-earned capital.

Indeed, it is possible to obtain a substantially higher return from bonds and easy-access savings accounts. The 10-year gilt yield currently stands at just under 4.4%, for example, while cash balances offer an income return in excess of 4% at present.

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In the coming months, it would be wholly unsurprising if the FTSE 100’s dividend yield comes under further pressure as a result of continued capital gains. After all, interest rate cuts enacted across the US, eurozone and the UK over recent months are set to have a positive impact on the world economy’s growth rate.

With further monetary policy easing likely to be implemented in the US and the UK as sticky inflation gradually eases, the operating environment for FTSE 100 stocks, which typically have a heavy international bias, should improve. This could lead to rising profits and stronger investor sentiment that prompts further capital gains and a lower dividend yield for the UK’s large-cap index.

Dividend growth potential

Of course, the FTSE 100’s relatively lacklustre dividend yield does not mean that investors should necessarily look to other asset classes for a worthwhile income. Crucially, an upbeat global economic outlook that leads to higher profitability among FTSE 100 members should allow them to raise dividends at a brisk pace. When combined with an anticipated fall in inflation over the coming months, investors in UK large-cap dividend stocks could experience a generous increase in their spending power.

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This contrasts with the outlook for other major asset classes. Easy-access savings accounts, for example, are set to offer a falling income return amid declining interest rates. When combined with the effects of inflation, this could lead to a substantial worsening in spending power. And with bonds offering a fixed income, their presently higher income return vis-à-vis the FTSE 100 is set to be eroded as the effects of dividend growth are gradually felt.

Source: Refinitiv as at 12 January 2026. Bond yields are distribution yields of selected Royal London active bond funds (as at 30 November 2025), except the global infrastructure bond which is 12-month trailing yield for iShares Global Infras ETF USD Dist as at 8 January. SONIA reflects the average of interest rates that banks pay to borrow sterling overnight from each other (8 January). Best accounts by moneyfactscompare.co.uk refer to Annual Equivalent Rate (AER) as at 12 January. *Includes introductory bonus.

High-yielding stocks

While the FTSE 100’s yield is now somewhat unappealing, especially on a relative basis, it is still possible to obtain a highly attractive income return from a basket of UK large-cap shares. Indeed, 41 of the index’s members currently offer a higher income return than the FTSE 100, with 27 of them having a dividend yield in excess of 4%. This suggests it is still possible to build a diverse portfolio of companies that together have a higher income return than that of other major asset classes.

Crucially, though, investors should seek to avoid potential dividend “traps”. This is where a stock has a relatively high yield based on historical dividend payments that ultimately prove to be unsustainable. For example, a company may be experiencing a period of financial difficulty that leads to a dividend cut which has already been priced in by investors via its high yield.

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Such companies may, as a result, provide a much lower level of income than their historical yield suggests. They could also produce a relatively weak share price performance as a result of deteriorating investor sentiment and/or lower profitability.

Avoiding dividend ‘traps’

Income seekers can increase their chances of avoiding dividend “traps” simply by focusing on company fundamentals. Considering factors such as dividend cover, which states how many times a firm could afford to make its shareholder payouts; interest cover, which shows how many times a company’s debt servicing costs were covered by operating profits; and focusing on a firm’s future financial prospects could help investors to prioritise stocks that are likely to pay a growing, rather than declining, dividend.

Furthermore, diversifying across a wide range of sectors can help income seekers avoid potential challenges that may be felt more keenly within certain industries. For example, three of the FTSE 100’s current five highest-yielding stocks operate in the Financials industry. Ensuring that a portfolio has exposure to other industries could lessen the impact of unforeseen sector-related difficulties and, ultimately, produce a more reliable and sustainable income stream over the long run.

A relatively high yield

British Land Co (LSE:BLND) is among the FTSE 100 index’s highest-yielding stocks at present. The real estate investment trust (REIT), which focuses on London-based offices and out-of-town retail parks, currently yields 5.5%.

While this is 260 basis points higher than the wider index’s income return, the company raised dividends per share by less than 1% in the first half of its current financial year. Furthermore, in its latest full year, the firm’s shareholder payouts were unchanged versus the prior year on a per share basis. This means that investors in the business have experienced a reduction in their spending power of late.

An improving income outlook

This trend could realistically persist in the short run. Although interest rates have been cut by 150 basis points over the past 17 months, their full impact on the economy is unlikely to be felt in the near term due to the existence of time lags. Once they pass, however, lower interest rates that may yet fall further from their current level should have a positive impact on the economy’s growth rate and spur higher demand, and thereby potentially raising rental income for British Land’s office and retail space.

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Indeed, the company’s latest half-year results stated that it expects earnings per share to rise by at least 6% in the 2027 financial year and to grow by 3-6% per annum thereafter. This is set to largely be passed on to investors in the form of a higher dividend. And with inflation expected to move closer to the Bank of England’s 2% target in the second quarter of the year, according to the central bank’s own forecasts, investors in the firm are likely to experience a real-terms rise in their income over the coming years.

Capital growth potential

An improving operating environment could also lead to a higher share price over the long run. Not only could it support higher property prices that boosts the value of British Land’s portfolio, but a stronger financial performance may also bolster investor sentiment towards the stock. Given that the company’s shares currently trade on a price-to-book ratio of just 0.7, even after their 16% rise in the past six months, there is scope for a significant upward rerating that could equate to relatively impressive capital returns.

In the meantime, the company’s financial position suggests it has the means to overcome further economic uncertainty. For example, its loan-to-value (LTV) ratio currently stands at 39.1%, while it has cash and undrawn credit facilities of £1.7 billion. The firm’s latest half-year results, meanwhile, stated that it was able to reduce administrative costs by 12%.

Long-term potential

Clearly, British Land’s share price could prove to be relatively volatile in the short run amid continued economic uncertainty. And while it has a far higher yield than the wider FTSE 100 index, the company’s dividend growth rate may prove to be somewhat lacklustre in the short run.

But as the impact of interest rate cuts on demand for commercial property is gradually felt, the company’s financial performance is likely to improve. This should lead to a positive real-terms increase in dividends, as well as scope for capital growth that follows on from its recent strong share price performance.

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