UK dividend shares under strain as payout amounts face pressure
Slow Dividend Growth Predicted for UK in 2025
In a recent announcement, Computershare, a leading global provider of financial market and technology solutions, forecasts a modest 2% growth in dividends for the UK in 2025, compared to 2024. This cautious outlook is primarily due to several factors, including a decrease in one-off special dividends, increased share buybacks, and exchange-rate effects.
The FTSE 100 dividend forecast has been revised down to around £80.4 billion for 2025, a significant slowdown from the earlier £83 billion estimate. Analysts attribute this to a decrease in growth momentum. The expected dividend yield for the FTSE 100 is approximately 3.5% for 2025, lower than previous years. This decrease is partly due to the index price rising by over 11%-12% in 2025, which, despite slightly higher payout totals, dilutes the yield.
Companies seem to be favouring share buybacks over substantial dividend increases. This trend is likely due to boards and CEOs preferring buybacks to avoid negative perceptions associated with dividend cuts or freezes. Some sectors, such as insurance and asset management, have maintained a steady dividend growth trend, albeit below inflation.
Exchange rate effects, particularly a stronger British pound versus the euro and dollar, are reducing the sterling value of dividends paid by multinational FTSE 100 companies that declare dividends in foreign currencies.
Despite the overall subdued dividend growth, there are pockets of strength in certain sectors like finance and aerospace. For instance, UK companies distributed dividends of £35.1 billion during the second quarter of 2025, a 1.4% decline year-on-year. However, this decline was mainly due to a halving of one-off special dividends to £2 billion.
Banks and insurers made a significant contribution to second quarter dividend growth, with payouts from banks increasing by 8.1% during the quarter, contributing one third of the total increase. Rolls-Royce, a major aerospace and defence contractor, paid its first dividend since the pandemic, contributing significantly to UK underlying dividend growth with a £508 million payout.
Investors seeking higher yields might have to look selectively within specific stocks or sectors while overall market-wide growth appears modest. Mark Cleland, chief executive of issuer services at Computershare, stated that the outcome was better than anticipated due to pockets of strength in certain sectors like finance and aerospace. Sustained economic growth is key to driving UK payouts higher again, as it will enable companies to grow the profits investors want to see.
- Investors who are financing their portfolios via dividends might face somewhat lower returns in 2025, as the predicted growth for UK dividends is a cautious 2%.
- Tariffs may not play a significant role in the 2025 dividend growth story, but factors like decreased one-off special dividends, increased share buybacks, and exchange-rate effects are.
- Some sectors, like finance and aerospace, have shown pockets of strength in terms of dividend growth, which could be attractive for investors looking for yield in a market where overall growth appears modest.
