- Small and mid-cap indexes offer higher’ potential dividend yields than the FTSE 100 in 2025 and 2026
- Dividend cover ratios across all growth indexes are forecast to surpass the FTSE 100 by 2026
- Recent M&A activity within the quoted UK equity markets is shining a light on small caps undervaluation
- UK growth indexes offer similar earnings growth potential to Nasdaq – a valuation gap presenting an interesting opportunity
Octopus Investments, an investment manager on a mission to invest in the people, ideas and industries that will change the world, today releases its bi-annual Dividend Barometer (the Barometer), which highlights why investors should consider UK small and mid cap companies for income.
Looking away from the FTSE 100, the Barometer reveals that several attractive dynamics are at play. For both 2025 and 2026, yields within the FTSE Small Cap Index and the FTSE 250 are expected to be above the FTSE 100. Yields in the FTSE Small Cap are expected to climb from 4.03% in 2025 to 4.41% in 2026. Meanwhile, dividend cover ratios across all growth indexes are forecast to surpass the FTSE 100 by 2026.
When it comes to earnings growth potential, current forecast consensus estimates suggest that both the FTSE AIM index and the Deutsche Numis Smaller Companies Index are expected to deliver a compelling 22% compounded annual earnings growth for the two years to December 2025.
This growth rate is comparable to the Nasdaq Composite, yet Nasdaq trades at around a 23.9x price to earnings multiple, whereas the FTSE AIM and Deutsche Numis UK Smaller Companies Index trade at far lower multiples – around 13x and 10.8x, respectively. This valuation gap presents an interesting opportunity: investors looking outside of the FTSE 100 for equity income can benefit from a growing dividend stream with the potential for material share price recovery as the market adjusts.
As for M&A, the Barometer highlights that in 2024, over 55 approaches were made to UK-listed businesses, with an average approach premium of almost 50%. This serves to remind investors of the pent-up value currently on offer within UK quoted small and mid cap companies. It also notes that these bids are often still at levels below where the share prices were trading before the market sell-off.
Now five years from the onset of the pandemic, the Barometer looks at overall cash payments and how smaller companies are setting new standards for dividend growth. Large cap stocks in the FTSE 100 are still playing catch-up, with cash payments lagging -5.7% behind pre-pandemic levels (2019). Smaller companies, however, have bounced back impressively. This is a continuation of the long term trend, where FTSE AIM, for example, has seen cash dividends surge by 44.4% over the past decade. This is compared to the FTSE 100’s modest 14.1% growth in the same period.
A further consideration for investors looking at traditional equity income funds is the level of stock correlation and concentration. The FTSE 100 remains by far the most concentrated index, with the top ten payers accounting for 54% of the total payouts. Other indexes are significantly more diversified – within FTSE AIM, the top ten payers account for 36% of total dividends, within FTSE Small Cap, they account for 34% and within FTSE 250, they account for 26%.
The Barometer has also revealed this edition’s ‘dividend diamonds’, two UK-listed stocks that have strong long-term growth dynamics and attractive dividends:
- Bloomsbury: a leading independent global publisher that has a strong balance sheet and has been rewarding shareholders through its progressive dividend policy.
- James Halstead: a Manchester based manufacturer of floor coverings that has an unbroken chain of increased payouts to shareholders for the last 49 years and counting.
New in this edition is the ‘hidden gem’, a business with robust growth dynamics at the earlier stages of its dividend journey. Moonpig Group has been selected, with its four market-leading brands focused on online gifting and its significant growth potential. It is also introducing a dividend policy that maintains robust cover of 3-4x and forecasts a yield of 1.6% for the financial year to April 2026.
Chris McVey, Deputy Head of Quoted Companies at Octopus Investments, comments:
“This edition of the Dividend Barometer suggests that while the last two quarters have seen a modest slowing in UK economic activity, there are bright sparks on the horizon. Expected further cuts to interest rates and a concerted push for growth from the UK Government could benefit small cap companies. Equally, in a time of global geopolitical uncertainty, UK stocks with strong fundamentals and consistent cash flows will prove well-placed to weather this turbulence.
“Whilst we await this UK growth equity value normalisation, investors are being rewarded with an attractive and growing income stream, especially when you look away from the FTSE 100. For diversification, dividends and growth, income investors should consider the less well-trodden path, and look towards resilient, small and mid cap listed UK businesses.”