The Income Investor: why I like this FTSE 100 share’s 6% dividend yield

Inflation has risen by 50 basis points over the past two months. It now stands at 3.1%, which is more than 50% higher than the Bank of England’s 2% target, with the central bank expecting inflation to exceed 4% within the next six months.

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Clearly, elevated inflation causes a headache for dividend investors. It means that the income they receive from their portfolio must grow at a faster pace than would otherwise be the case in order to improve, or merely preserve their spending power. 

Failure to at least match inflation in this respect could lead to a declining standard of living for those investors who rely on their portfolio for much of their income.

An evolving economic outlook

Rising inflation that is set to move even higher over the coming months may therefore prompt a renewed focus on dividend growth among income-seeking investors. While this is understandable, and obtaining inflation-beating dividend growth should always be a key aim for income investors, it should not come at the expense of a worthwhile yield.

This is particularly relevant following the FTSE 100 index’s recent performance. Having risen by 12% in the past year and by 50% over the past five years, the UK’s large-cap index now yields just 3.1%. Income seekers who over-prioritise dividend growth could therefore easily end up with a low-yielding portfolio that, while having the potential to deliver a real-terms rise in dividends even amid the current period of high inflation, does not meet its raison d’etre of providing a worthwhile income.

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Moreover, inflation is widely forecast to fall after peaking in the first quarter of next year. In fact, it is set to stand just 30 basis points above the Bank of England’s 2% target by the end of 2027. This suggests that obtaining an attractive yield should continue to be viewed as a cornerstone of income investing, in tandem with a future rate of dividend growth that has the potential to be positive in real terms.

Total return potential

Alongside appealing dividend yields and a brisk growth outlook in shareholder payouts, it may be logical for income investors to presently focus on cyclical sectors. After all, a prospective fall in inflation that means it is close to the Bank of England’s 2% target within just 15 months could shift the central bank’s focus from possible interest rate rises to interest rate cuts.

Once time lags have passed, the introduction of a looser monetary policy should boost the economy’s performance. In turn, this is likely to provide greater scope for higher profits among those firms which are relatively reliant on it. Ultimately, this should allow them to pay higher dividends to investors.

Such firms may also benefit from higher market valuations over time as investors begin to price in a more upbeat financial performance amid increasingly buoyant industry conditions. With several cyclical stocks having lagged the index’s performance over recent years, and currently trading on modest market valuations as a result, they may offer scope for generous upward reratings and attractive capital returns alongside their improving income prospects.

Source: Refinitiv as at 7 October 2026. Bond yields are distribution yields of selected Royal London active bond funds (as at 5-6 October on Trustnet), except the global infrastructure bond which is 12-month trailing yield for iShares Global Infras ETF USD Dist as at 5 October. SONIA reflects the average of interest rates that banks pay to borrow sterling overnight from each other (2 October). Best accounts by moneyfactscompare.co.uk refer to Annual Equivalent Rate (AER) as at 7 October and which exclude bonuses.

Potential threats

In the meantime, of course, cyclical firms with attractive yields and long-term dividend growth potential must survive a period of ongoing economic and geopolitical uncertainty. Indeed, threats such as further conflict in the Middle East and a ramp-up in the global trade war, alongside aforementioned economic uncertainty, mean that investors should continue to focus on firms with sound fundamentals.

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This may, for instance, include companies that have well-covered dividends so that they can afford to maintain an attractive level of shareholder payouts even if their financial performance comes under pressure. Similarly, businesses with a competitive advantage, such as a large market share or a high degree of customer loyalty, may be better able to ride out a period of economic and geopolitical uncertainty to deliver sustained dividend growth in the long run.

An upbeat income investing outlook

For example, FTSE 100 constituent British Land Co (LSE:BLND) currently yields 5.9%. This is 280 basis points greater than the index’s yield, with the owner of London offices and logistics assets, as well as retail parks located across the UK, having the potential to deliver inflation-beating dividend growth over the coming years.

Indeed, it expects to post a rise in earnings per share (EPS) of 3-6% per annum over the long run. Given its status as a real estate investment trust (REIT), its shareholder payouts are likely to increase at a similar pace to its earnings in future. And with inflation due to be substantially below 3% by the end of 2027, investors in the company could realistically experience a gradual improvement in their spending power.

An improving operating outlook

The company is also well placed to benefit from the effects of a prospective fall in inflation and potential interest rate cuts on the longstanding cost-of-living crisis. Less pressure on disposable incomes should provide a boost for the retail sector and lead to higher demand for British Land’s roughly 1,200 retail unit portfolio. Given that occupancy levels among the trust’s retail parks currently stand at 99%, this could bolster the pace of rent rises and further catalyse the company’s financial performance.

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Similarly, lower interest rates that aid the economy’s outlook are likely to lead to higher demand for the firm’s London office locations. An increasingly upbeat operating outlook could, in addition, prompt improved investor sentiment towards the firm’s shares. Since the stock currently trades on a price/book (PB) ratio of just 0.67 following its 20% decline over the past five years, there is scope for a sizeable upward rerating and generous capital returns to complement its income appeal.

Near-term uncertainty

Clearly, the company’s near-term outlook is relatively uncertain. Economic and geopolitical risks could weigh not only on investor sentiment towards its shares, but also on its financial performance.

Indeed, the company raised dividends per share by just 1% in its latest financial year having failed to increase them the year before. Should above-target inflation persist for longer than expected, thereby potentially meaning higher-for-longer interest rates, investors in the company could yet experience a further reduction in their spending power in the near term.

Additionally, the company has a new, externally appointed CEO. While this may prove to be a positive catalyst for its financial performance and dividend growth rate in the long run, it could also introduce a degree of uncertainty in the short run. Indeed, as per any change in a company’s CEO, there is the potential for a shift in strategy that leads to elevated share price volatility over the near term.

Risk/reward ratio

British Land, though, appears to have the financial means to overcome a period of heightened uncertainty. Its loan/value (LTV) ratio, for example, stands at 39.2% and is expected to fall as property valuations prospectively rise in future.

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Moreover, the company has access to £1.6 billion in cash and undrawn debt facilities, while it does not need to refinance its debt until 2029. This means it may be relatively unaffected by a period of rising inflation that could lead to higher borrowing costs in the short run.

When combined with its relatively attractive yield, prospects for inflation-beating dividend growth over the long run and wide margin of safety, the company appears to offer a favourable risk/reward opportunity for income-seeking investors.

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