Is it wise to purchase dividend stocks in the UK?

Despite a 4 point 6 percent annual decline, UK dividends in the first quarter came to £14 billion, exceeding forecasts

Which industries paid the most, and will Trump's tariffs lead to reductions in spending?

Some of the most well-liked investments in the UK are dividend stocks, especially for people who want a portfolio with consistent income or liquidity. But lately, dividend growth has slowed.

In the first quarter of 2025, UK companies distributed 14 billion in dividends, a 4 point 6 percent decrease from the same period the previous year. The total was decreased through three company cuts and a reduction in special dividends, also referred to as extra dividends. Bellway Homes, Burberry, and Vodafone were among them.

Nevertheless, the most recent data from stock transfer firm Computershare presents a more optimistic picture than anticipated.

Special dividends are not included in the underlying dividend growth, which decreased by just 0.2 percent. The actual number was 2 points 7 percentage points higher than anticipated. Computershare also mentioned "encouraging growth" in industries like industrials, healthcare, food, and leisure.

The pharmaceutical behemoths AstraZeneca and GlaxoSmithKline both raised their dividends by 6 and 7 points, respectively, making healthcare companies among the largest dividend payers in the first quarter.

The telecom industry's decision to cut its payment in half was the main cause of the biggest negative contribution. When Bellway reduced its total dividend from 1 point 40 to 0 point 54 last year, with investors receiving the last payment at the beginning of the first quarter, it also caused housebuilders to drop.

The trade disruption brought on by US President Donald Trump may have a negative impact on company profits in the future. The UK market, however, might be more protected than others because Trump hasn't singled it out for higher tariffs.

The chief executive of issuer services at Computershare, Mark Cleland, stated that "most companies seek to deliver steady income growth over time for their investors, so dividends are typically less likely than company profits to experience short-term fluctuations, either during economic turbulence or in boom times."

"However, any cooling brought on by the current turmoil in the real world economy and financial markets is probably going to have an impact on profits, which will then have an impact on dividend payments.

Given that dividends are a lagging indicator, any effects are more likely to manifest over the course of several quarters. Historically, discretionary special dividends have proven "more vulnerable" during difficult economic times, according to Cleland.

Which industries had the fastest rate of dividend growth?

With total dividends up 75.3 percent year over year, airlines, leisure, and travel all demonstrated robust dividend growth in the first quarter. An important driver was EasyJet. Following the announcement of a 34% increase in 2024 profits, the airline raised its total dividend from 4p5 to 12p1 per share.

Other industries that saw strong growth included general finance, real estate, healthcare, and pharmaceuticals.

The biggest contributors in terms of cash were the pharmaceutical and healthcare sectors, which collectively paid out 3.2 billion in dividends to shareholders. The total payouts increased by 76% from the previous year.

Second-place oil, gas, and energy firms returned £2.07 billion, but this resulted in a headline growth rate of -1.9%. Computershare claimed that because of extensive share buyback programs, lower oil dividends were mostly due to fewer shares.

In addition to dividend payments, companies may also repurchase shares to give back cash to shareholders. Shell and BP repurchased their shares in 2024 for a total of 19 billion.

The UK market has seen a sharp rise in share buyback activity since the pandemic, with 63.02 billion in buybacks in 2024. AJ Bell, an investment platform, reports that FTSE 100 companies have already announced buybacks totaling 30 Point 9 billion in 2025.

Leading dividend-paying companies.

In cash terms, AstraZeneca, Shell, British American Tobacco, BP, and Unilever were the top five payers. According to Computershare, their combined payout of 7.5 million accounted for 54% of all payouts made in the UK during the first quarter.

Some concentration risk was indicated by the fact that the top 15 payers accounted for 83% of the total. Considering the difficult macroeconomic environment, this could exacerbate investor worries. Experts, however, think there are grounds for optimism regarding the UK market.

The portfolio manager at Henderson High Income Trust, David Smith, stated, "It's important to remember that UK companies are in a healthy position with strong balance sheets, and ordinary dividends are well covered by profits much more so than at the start of the Covid pandemic."

Smith thinks regular dividends will be strong in the future and is "encouraged" by the Computershare report's mention of the typical (or median) growth rate of 3 to 3 percent. This aligns with his projections for this year's underlying dividend growth.

Companies that want to protect their cash flows are more likely to reduce special dividends and share buybacks accordingly.

Should income investors purchase stocks in the UK?

The total dividends paid out by the UK market this year are anticipated to be 900.1 billion, the same amount as in 2024. A stronger pound is probably going to be a disadvantage, lowering the sterling value of dividends paid out in US dollars.

Nevertheless, investors seeking income may still find UK stocks appealing. Computershare predicts that they will yield 3 to 7% over the next 12 months. As a point of comparison, 10-year gilts are currently yielding 4.5 percent.

Although stocks offer more opportunities for capital growth, gilts are less volatile than the stock market. This implies that they are more likely to outperform inflation in the long run. Later this year, inflation is predicted to reach 3.75 percent.

It's also important to note that when share buybacks are taken into account, the overall cash yield on UK stocks is significantly higher.

AJ Bell shared consensus estimates that the FTSE 100 companies will pay out 83 billion in 2025. Up to this point, buybacks totaling £309 billion have been announced. With this, the FTSE 100's overall "cash yield" of 5.2 percent becomes much more alluring.

As of market close on April 24, the FTSE 100 was up 2 points, or 0.9 percent, which is a significant improvement over its US and international peers so far this year. During this time, the FTSE All World has dropped more than 10%, while the S&P 500 has dropped nearly 7%.