UK dividends to fall in 2025: the shares the pros are backing

Dividend payments from UK companies are under pressure, with listed businesses set for the worse year for distributions since 2021, when they were struggling with the Covid-19 pandemic. Computershare, which publishes the quarterly UK Dividend Monitor, now expects UK company dividends to total £87.2 billion this year – that would be a 2.3% decline compared to 2024.

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The value of dividend payments made by UK companies fell, year-on-year in each of the first three quarters of the year, Computershare reports. This is a highly unusual sequence of declines. The firm has also recently downgraded its forecast of fourth-quarter dividends, with a number of companies signalling that they will pay out less than previously expected.

To put this year’s figures into context, total UK dividend payments have exceeded £90 billion in each of the past three years. The yield on UK shares will average just 3.3% over the next 12 months, Computershare forecasts – more gloom for income-focused savers and investors already facing an economic environment in which interest rates are expected to fall sharply.

It's not all bad news. One significant driver of this year’s overall decline is that around 160 companies have run share buyback programmes, opting to use excess cash to fund such initiatives, rather than to pay special dividends to shareholders. Investors in these companies will have enjoyed a payout, but in a different form to conventional dividend distributions. Restructuring the capital base in this way also means future dividend payments will be higher per share.

Richard Hunter, head of markets at interactive investor, explains:“Any slight decrease in dividend payouts this year could well be explained by the increasing propensity of companies to undertake share buyback programmes, often at the expense of dividend increases, to enhance shareholder returns.

“Different companies inevitably have different approaches, however. Retail bellwether Next (LSE:NXT), for example, will only undertake buybacks if the share price falls below its own calculated target (which was last advised at £121 per share, as compared to the current price of £141). In this instance, the company has estimated a special dividend of £3.10 to be paid instead later in the year.”

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There are also some reasons to be optimistic, with the outlook for payouts from the traditionally dividend-heavy oil, pharmaceutical and financial sectors now improving; the fact that banks escaped new taxes in the November Budget represents an additional positive here. It’s also the case that dividends from medium-sized companies in the FTSE 250 index have proved more resilient than distributions from their blue-chip FTSE 100 counterparts.

Hunter adds: “Elsewhere, the dividend outlook seems set fair, especially for the financial sector and specifically for the UK banks. Dividend yields can be generous, ranging from 3.6% for Lloyds Banking Group (LSE:LLOY) to 4.1% for NatWest Group (LSE:NWG) and 4.5% for HSBC Holdings (LSE:HSBA).

“Defensive stocks are usually reliable sources for income-seekers, with yields of 5.6% for British American Tobacco (LSE:BATS) and 5.5% for Imperial Brands (LSE:IMB), for example. The utilities are often also generous payers, such as National Grid (LSE:NG.) (4.2%) and Severn Trent (LSE:SVT) (4.6%), as well as the oil majors (BP (LSE:BP.) at 5.6%, and Shell (LSE:SHEL) at 4.0%).

“As for dividend safety, such as it is, investors may want to bear in mind dividend cover – that is the company’s ability to pay. Dividend cover gives an indication of whether dividends are being distributed from previous profits (a number of less than 1), which is clearly unsustainable; a number of 1.5 or above is generally accepted to be comfortable. For example, BATS and Imperial Brands have dividend cover of 1.5 times and 2 times respectively.”

Nevertheless, 2025 has been a challenging year for investors who rely on dividends – and the uncertain macro-economic and geopolitical backdrop could provide further headwinds in 2026 and beyond. We asked three leading equity income fund managers for their views on where dividends are headed – and where to focus their search for income.

Why headline dividend yield has been falling

Laura Foll, co-manager of the Lowland Ord (LSE:LWI) and Law Debenture Corporation Ord (LSE:LWDB) investment trusts, points out that there are a couple of reasons for the decrease in the dividend yield from the FTSE 100 in recent years.

She notes: “The first is that share prices have gone up, causing the yield to compress. So, that’s a positive. The second is that after Covid many companies that had been arguably paying too much in dividends, took the opportunity to reset.”

Foll is finding some of the most appealing income opportunities today further down the market cap spectrum. She notes that the FTSE 250 now offers a higher dividend yield of around 4.6%.

“That’s in large part due to underperformance in recent years from more domestically focused, smaller company UK shares in the wake of Brexit. But there are still some outstanding companies in this area. We like companies that deliver a decent dividend yield but only if it’s sustainable – because they’re investing in the business as well. Hill & Smith (LSE:HILS) in engineering and Cranswick (LSE:CWK) in meat processing are great examples of those companies investing in growth and paying attractive dividends.”

Beyond industrials, Foll points to “some of the better-quality retailers, such as Dunelm Group (LSE:DNLM), that are well-managed, investing and building market share.”

She adds: “Gloomy sentiment about the UK economy has weighed on these shares, but that makes many of them potentially attractive for a patient investor, who’s being rewarded with income for their patience.”

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Nick Shenton, co-manager of the Artemis Income I Acc fund, says that it is important to look beyond headline dividend yields. “We are income investors, but our mantra is cash flow first, dividend second. Cash flow is profit available after everyone has been paid. It can be used for distributions via dividends, and for share buybacks, plus investment to grow the value of the business for owners. This focus on cash flow over headline yield figures helps avoid value traps.”

Shenton addresses buybacks, pointing out that they have become a big part of total return – shaping cash flow and dividend growth. “There are several areas where we’ve seen companies buying back stock consistently for three or four years and they’re doing this out of excess cash flow, not money they’re borrowing. That’s delivering enhanced returns across the UK market. Our average holding period is eight years and over that length of time, the combination of dividends and buybacks can compound powerfully,” says Shenton.

He adds that the team spend most of their time investigating and understanding change in industries. “No factor has been more of a catalyst for change than technology,” Shenton notes. “UK companies have had to face up to the threat of disruption, invest in their digital core and turn technological change from a threat to an opportunity – or be disrupted. Many have.”

Shenton continues: “Companies at the ‘thick end of the wedge’ of the value chain can leverage developments in AI and cloud to enhance their customer value proposition in ways that are unique to them. Technology is commoditised, but brands, content, intellectual property, distribution, and customer trust are not. At the core of this is ownership of one-of-a-kind proprietary data on which to train models. Around a quarter of the companies we invest in own these unique datasets, including businesses such as Tesco (LSE:TSCO), London Stock Exchange Group (LSE:LSEG), Sage Group (The) (LSE:SGE) and RELX (LSE:REL).”

Global fund manager notably overweight the UK

For James Harries, co-manager of STS Global Income & Growth Trust Ord (LSE:STS), the focusisinvesting in quality companies that have the potential for persistent earnings and, importantly, dividend growth.

He has been moving to take advantage of the “unloved” UK market, which he says “has been in the doghouse for a long time and, to us, looks cheap geographically and idiosyncratically”. The investment trust holds a third of its assets in the UK, much higher than the UK’s minuscule 3.6% weighting in the MSCI World index, a proxy for the global stock market.

Harries is backing several UK holdings, spanning different sectors. He notes: “One example is InterContinental Hotels Group (LSE:IHG), which is a really high-quality business. It doesn’t actually own the underlying hotels – a business model that leads to strong returns on capital – and it continues to attract new hotel owners to its network. 

“We also hold Reckitt Benckiser Group (LSE:RKT), which has faced some challenges in recent years but remains known for its high-quality products and strong brands. The company makes consumer health products – and when people are unwell, they tend to be very brand loyal regardless of cost. The stock is a solid part of our portfolio.”

Due to its greater domestic focus, Harries describes Admiral Group (LSE:ADM) as arguably the only “proper” UK company we own. He says: “It is a standout and superbly well-managed business. It is unusual for an insurance company to make a profit from underwriting, and it has navigated the recent cycle brilliantly.”

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A fourth example is Rentokil Initial (LSE:RTO), with the fund manager noting that “while pest control might not seem attractive – the sector tends to grow steadily”. Harries adds: “Regulations often require firms to have pest control; it’s not a discretionary spend. And as people around the world become wealthier, they also tend to spend more on pest control.”  

By contrast, Harries notes that sectors such as banks, oil and mining companies tend to be either highly levered or highly cyclical – or both.

“The result is there will be periods when earnings and dividend growth are strong, and over the long term, periods owing to economic weakness or variables outside the companies’ control, such as fluctuating commodity prices, that crimp free cash flow growth and, therefore, dividends. These are sectors we avoid.”