What is the outlook for UK dividends in 2025?

Dividends from UK equities are expected to display limited growth this year, and in fact – given the precarious state of the UK economy – might underperform the yields that investors could realise from bonds.

“Over 2025 we predict equities to yield 3.8%,” says Cleland. “The top 100 is likely to yield 3.8% and the mid-caps 3.5%.”

These yields are below the returns that 10-year gilts are yielding, which increased to over 4.6% in recent weeks. Gilts are generally regarded as a safer investment than equities, and in the current climate they are also offering higher yields.

“This means UK gilts are offering a significantly better income than shares at present for a lower risk (if they are held to maturity),” says Cleland.

Computershare’s analysis predicts “dividends in 2025 to reach £92.7bn at the headline level: up just 0.7% year-on-year”.

How have share buybacks impacted UK dividends?

Dividends aren’t the only means by which companies return capital to shareholders. They also do so via share buybacks, and UK companies have ramped these up over the last year.

Computershare estimates the size of UK share buybacks in 2024 at £42-45 billion; “less than the record achieved in 2022 when companies returned cash preserved during the pandemic-inspired dividend cuts but well above the pre-2020 annual average”, says Cleland.

Buying back shares reduces the number in circulation, so increases the value of those that remain. However, it also makes less money available for dividend payments, and Cleland argues that this has been another contributing factor to the decline in dividend payments.

“The trend for companies to buy back their shares with excess cash at the expense of special dividends continues,” says Smith, while adding that “underlying dividend growth next year should be supported by international earners and banks, while dividend cover for the UK market in aggregate is healthy.”

Money Week