The FTSE 100‘s common dividend yield has dipped beneath 3% for the primary time since Covid, based on knowledge from dividenddata.co.uk. For brief durations in 2020 and 2021, the yield fell beneath 3% — however has largely remained above that common since 2002.
That’s a wake-up name for income-hungry retirement buyers. With the Shopper Costs Index (CPI) at 3.4%, rates of interest at 3.75%, and the FTSE at highs over 10,200, is it the tip of UK shares as dependable revenue machines? Or is it a wholesome signal of capital progress?
Why yields are falling
Low yields don’t sign weak spot â they’re really an indication of power. When share costs rise quicker than dividends develop, the yield naturally compresses. In 2025, mining, defence and finance helped the Footsie surge almost 20%, ramping up valuations. Whereas payouts stay strong (forecast 3.4% in 2026), index yields shrink as costs climb.
Zooming out, the macro image is encouraging. The OECD simply upgraded UK progress to 1.2% for 2026, retail gross sales stunned to the upside (+0.4%), and client confidence hit its highest stage since August 2024. Inflation sits at 2.1%, the Financial institution of England base charge is 3.75% (with cuts anticipated by way of the 12 months), and gilts yield round 3.5%.
Most significantly, whole returns (dividends plus worth progress) have traditionally beat inflation by a rustic mile. So anybody nonetheless holding money financial savings might be dropping buying energy.
So is revenue lifeless?
I wouldn’t hand over on dividend investing simply but. Even with index yields compressed, particular person UK shares nonetheless supply mouth-watering revenue. Take into account Admiral Group (LSE:ADM), the insurance coverage and worth comparability big. It yields round 6.7% with dividend cowl of 1.8 occasions — that means payouts are safely coated by earnings. Higher but, it boasts over 20 years of uninterrupted dividend payouts.
A £100,000 holding in Admiral would generate £5,500 yearly, 100% tax-free inside an ISA. So it’s nonetheless an interesting inventory to contemplate for long-term dividend revenue. Plus, the corporate’s digital moat retains prices aggressive, including defensive prospects for an income-focused portfolio.
My solely concern could be regulatory scrutiny. Previously, the Monetary Conduct Authority (FCA) has flagged concern round premium finance merchandise — a key income for Admiral. If the FCA tightens regulation, or bans these practices outright, insurers may take a revenue hit, threatening dividend protection.
Steadiness it with progress
For retirement savers with a 20-25-year outlook, progress may compound more durable than revenue. For instance, a 1%-yielder with 12% annual NAV progress beats a 6%-yielder with no progress, full cease.
Dividend shares nonetheless maintain a crucial place in a portfolio geared toward passive revenue however progress shares may velocity up the journey. These hoping to seize the most effective of each worlds could contemplate a tech-heavy progress automobile like Scottish Mortgage Funding Belief.
This highly-diversified belief invests in firms world wide, together with high S&P 500 names, non-public fairness corporations and rising market leaders.
So whereas yields could look low lately, my technique stays the identical: accumulate high quality dividend shares supported by defensive performs and powered by compounding progress.
The put up FTSE 100 dividend yield beneath 3% for first time since Covid appeared first on The Motley Idiot UK.
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Extra studying
- 2 FTSE 100 shares to contemplate for passive revenue in 2026
- Iâm concentrating on an annual dividend revenue of £25,451 from my £20,000 holding on this 8.9%-yielding FTSE gem!
- I missed my probability to purchase this FTSE 100 inventory final 12 months. Now it’s again on the similar worth…
- Down 22% with a P/E of 9, is Hikma probably the greatest passive revenue picks proper now?
- How a lot do you have to make investments to make a £650 month-to-month second revenue?
Mark Hartley has positions in Admiral Group Plc and Scottish Mortgage Funding Belief Plc. The Motley Idiot UK has advisable Admiral Group Plc. Views expressed on the businesses talked about on this article are these of the author and subsequently could differ from the official suggestions we make in our subscription companies comparable to Share Advisor, Hidden Winners and Professional. Right here at The Motley Idiot we imagine that contemplating a various vary of insights makes us higher buyers.
