A good number of small-cap funds come with an edge on the income front.
30th June 2026
by Dave Baxter from interactive investor
Investing comes with its fair share of cliches, and enough of those apply to the world of smaller company investing.
Those who like to back small caps will most likely know that it can be pretty risky, can require more thorough research than simply buying blue chips, and that it should (in theory) deliver better returns over a long period.
That’s all well-rehearsed material but small-cap investing can offer some surprises, too.
Right now this is most notable on the income front: a decent number of UK small-cap funds are throwing off eye-catching yields.
That makes sense in some respects: companies with high growth rates can end up generating lots of spare cash and some of this might be funnelled into dividends.
But it’s worth being aware of this trait, for growth and income investors alike.
Those in the first camp might be keen to plough any payouts back into investments that can compound over time rather than sitting on any income they receive, while dividend hunters might be interested in what small caps can do for them.
The second point is especially pertinent given that the yields on large-cap focused UK income funds have fallen back in the wake of strong total returns.
Here, we showcase the UK small-cap funds with the chunkiest yields, the story behind those metrics, and what kind of portfolios have made it into the list.
Some familiar faces
Our table lists those dedicated small-cap funds with a yield of at least 4.5% – well in excess of the roughly 3% on offer from the FTSE 100, and comfortably ahead of the average of 3.9% from the Association of Investment Companies’ (AIC) UK Equity Income sector.
Many of the names in said sector will have a decent slug of exposure to blue-chip shares although it’s worth noting the highest-yielding name, Chelverton UK Dividend Trust Ord SDV
currently yielding 7.2%, does look further down the market cap spectrum.
The names in the table, by contrast, do not have a stated commitment to income above all else. But they are churning out some big dividends for now, which might turn heads. .
However, it is worth noting that a much talked about potential catalyst for a pick-up in performance – lower interest rates – appears off the table. Instead, the base rate is expected to remain at 3.75% for the foreseeable future.
| Fund | Dividend yield (%) | One-year total return (%) to 24/06/26 | Five-year return (%) | |
| Marwyn Value Investors Ord MVI0.3 | 6.5 | 28.2 | 70.1 | |
| Montanaro UK Smaller Companies Ord MTU0.0 | 6.1 | 8.3 | -15.8 | |
| Athelney Trust Ord ATY0.0 | 6.1 | 1.3 | -17.2 | |
| Aberforth Geared Value & Income Ord AGVI3. | 5.6 | 15.4 | N/A | |
| VT Downing Small & Mid-Cap Income Inc (B625QM8) | 4.7 | -5.6 | 6.9 | |
| Artemis UK Future Leaders Ord AFL0.1 | 4.5 | -7.1 | -33 | |
| JPMorgan UK Small Cap Growth & Income JUGI0. | 4.5 | 2.1 | -3.3 |
Source: AIC as at 22/06/26 and Downing factsheet. Past performance is not a guide to future performance.
The first name in the list, Marwyn Value Investors Ord MVI
has set itself apart from the crowd in multiple ways, if not all of those are definitely appealing.
In its own words, the team looks “to work in partnership with exceptional industry executives who bring long-standing industry experience and operational expertise”.
They often use the “buy and build” approach of investing in a business and then acquiring and merging it with smaller, complementary companies.
Marwyn favours companies with little debt and a focus on reinvesting capital into the business.
In practice, as we have discussed before, this is a fund that has performed very strongly but takes some big bets.
As the table shows, the fund has done extremely well over a 12-month period, in no small part thanks to the enormous returns made by European telecoms company Zegona Communications ZEG
The shares have returned around 140% over 12 months, and as Marwyn notes the company has enjoyed various wins, from a special dividend to a share buyback programme.
But the fund is heavily exposed to its top positions: Zegona makes up roughly a third of the portfolio, InvestAcc Group Ltd Ordinary Shares INAC
accounts for 22.1% and AdvancedAdvT Ltd Ordinary Shares ADVT makes up 16.6%.
As we have noted before, Montanaro UK Smaller Companies Ord MTU
which yields just more than 6%, takes a very different tack.
It has a well-diversified portfolio, has had a much more mixed track performance record as of late in part due to its quality growth investment style, and follows an enhanced dividend policy where it pays a quarterly dividend equivalent to 1.5% of net asset value (NAV).
An enhanced approach
Enhanced dividend policies, where trusts can use reserves or capital to partly fund their payouts and where many also look to pay out a set proportion of net asset value (NAV) each year, have become much more widespread in recent years. That’s one way trusts are trying to appeal to a wider base of investors and fight discounts.
Montanaro UK Smaller Companies is in that list as mentioned, and it’s notable that it boosted its dividend when activist investor Saba Capital was lurking on its shareholder register.
But a good number of other names in the table also use an enhanced dividend policy of some form, something that makes sense if smaller companies aren’t always the most consistent with such payouts
In keeping with many of its stablemates, JPMorgan UK Small Cap Growth & Income JUGI
intends to pay at least 4% of NAV to investors, as based on a valuation at the end of the preceding financial year.
Artemis UK Future Leaders Ord AFL
which came under the management of Artemis last year, has its own 4% target that can be bolstered using capital.
Enhanced dividend policies can be useful in that they allow funds to provide dividends without limiting their investments to companies with high yields – although there are risks that the payouts will falter if the NAV drops.
Note that Athelney Trust Ord ATY
Aberforth Geared Value & Income Ord AGVI
and VT Downing Small & Mid-Cap Income Inc (B625QM8) (the only open-ended fund in the list) have a more traditional approach to generating dividends.
Performance woes
UK small and mid-cap shares have had a rocky few years and that’s reflected in the performance of some of these funds. Many are down, or sitting on lacklustre returns, over one and five-year periods.
Marwyn Value Investors has bucked this trend, while the Montanaro team has seen a decent pick-up in performance over one year. Another strong performer over one year, meanwhile, is Aberforth Geared Value & Income
As the name suggests the fund’s managers follow a value investment style, and like many a small-cap fund they actually have a big allocation to mid-cap shares, with 60% of the fund in the FTSE 250. By sector it’s industrials, financials and consumer discretionary shares that are best represented in the fund.
The fund’s position sizes are pretty limited, with metal flow engineering specialist and top holding Vesuvius VSVS
accounting for just 4.7% of the portfolio.
But some well-known financials are in the list too, from the now controversy-mired Rathbones Group RAT
to Quilter Ordinary Shares QLT
and Jupiter Fund Management JUP.
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