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Octopus Investments Dividend Barometer: Small and mid-cap yields to outstrip the FTSE 100 by 2025

10 Apr 2024
  • Small and mid-cap companies’ dividend yields set to outperform the FTSE 100 by 20251
  • Small and mid-cap companies’ dividend cover forecast to be greater than the FTSE 100’s for the first time in five years
  • FTSE 100 total cash dividends remain 20% below pre-Covid levels, with relatively stagnant growth forecast
  • FTSE 100 remains highly concentrated, with top 10 largest payers accounting for over half of all dividends

Octopus Investments, an investment manager part of the Octopus Group, today releases its bi-annual Dividend Barometer report, which champions the lesser-known dividend qualities of smaller and mid-cap companies.

As seen in previous Dividend Barometer reports, UK large caps continue to lag as a source of dividend growth. In 2023, FTSE 100 total cash dividends were 20% below pre-Covid levels (2018: £98bn; 2023: £83bn), and there does not appear to be an imminent recovery on the horizon2. The FTSE 100’s total cash dividend forecast to be paid out in 2025 will be almost 11% below pre-Covid levels, compared to total UK cash dividends excluding the FTSE 100, which are predicted to be approximately 5% higher than in 2018.

The dividend yield for the FTSE Small Cap, and FTSE 250 ex-IT are both due to exceed the FTSE 100’s for 2025 based on current forecasts (FTSE 100: 4.26%; FTSE 250 ex IT: 4.46%; FTSE Small Cap: 4.53%)3. This will be the first time both indices have outstripped the FTSE 100 in a decade, highlighting the significant valuation disconnect within the smaller cap indices currently. Moreover, the FTSE 100 is forecast to deliver dividend growth of just 22% over the 10 years to 2025. This is in stark comparison to FTSE AIM, where the overall cash dividend is forecast to have grown by over 82% in the same period.

Alongside the yield and total cash paid, dividend cover remains an extremely important consideration for income investors, showing the amount of profit a company has available to meet its obligations to pay a dividend. We have previously highlighted that FTSE 100 cover had declined, and whilst this has recovered to a more sustainable base of 2x profits, investors must still proceed with caution.

Many traditional FTSE 100 income stocks still have limited cover, while the FTSE Small Cap and FTSE 250 ex-IT are both expected to benefit from better dividend cover than the FTSE 100 as a whole. For example, of the top 10 largest payers in the FTSE 100, HSBC has 1.6x cover, Unilever has 1.52x, and National Grid has just 1.23x.  In 2024, the FTSE 100 is forecast to have the least amount of dividend cover, at 2.12x, than the Small Cap (2.66x) and 250 ex-IT (2.31x) indices for the first time in five years, while the FTSE AIM (3.67x) continues to outstrip all three.4

The FTSE 100 also remains the most concentrated dividend index by far, with the top 10 largest payers accounting for over half (57%) of all dividends due to be paid in 2024. This compares to 22% for the FTSE 250 ex IT, 33% for the FTSE Small Cap ex IT, and 36% for the AIM.

While the financial sector is the biggest dividend payer across all indices, subsectors vary significantly. In the FTSE 100, HSBC, Lloyds, Barclays, Nat West and Legal & General make up more than 73% of the expected financial sector payouts. Compare this to the FTSE 250, where the top five expected payers in the sector are abrdn, Investec, Direct Line Insurance, Hargreaves Lansdown, and British Land, and make up just 24% of the expected sector payouts.

Chris McVey, Fund Manager of the FP Octopus UK Multi Cap Income Fund, comments:

“We launched the Dividend Barometer a year ago to highlight both the risks of relying too heavily on the largest stocks for income, as many UK funds have historically done, as well as to raise awareness of the often-overlooked dividend credentials of smaller companies.

“Retail investors may not realise that the income fund they hold, many of which have traditionally been heavily weighted to the FTSE 100, today leaves them over-exposed to a relatively small number of companies with sub-par dividend growth and cover. The trends we have identified are not going away, and looking outside the largest UK stocks can ensure investors can access a more sustainable and more diversified income.

“Alongside the better dividend prospects, smaller companies can provide significantly better capital returns. As interest rates normalise, we predict investor appetite for small-caps will return, as people seek to benefit from the higher growth and opportunities provided by the asset class.”


Notes to Editors:

1. Source: Factset – forecast for 2025: FTSE 100 – 4.26%; FTSE 250 ex IT – 4.46%; FTSE Small Cap – 4.53%

2. Source: FactSet, Octopus Investments

3. Source: FactSet

4. Source: FactSet