UK high-yield stocks face pressure on dividend payouts
UK Dividends in H2 2025: A Mixed Picture
The forecast for UK dividends in the second half of 2025 paints a nuanced picture, with a slight decline expected in the third quarter and flat dividends in the final quarter. This results in a total year dividend payout of approximately £88.3 billion, marking a 1.4% year-on-year decrease compared to previous estimates.
Several factors contribute to this headline reduction. Firstly, there is a decrease in one-off special dividends expected in 2025. Secondly, increased share buybacks are reducing dividend payouts. Thirdly, the negative impact from exchange rate fluctuations, notably due to dollar weakness amid global trade tensions, is also a significant factor. Lastly, rising economic uncertainty and taxation pressures are affecting corporate profits and dividend capacity.
However, after adjusting for these special dividends and exchange-rate effects, the underlying dividend growth is actually forecasted to be positive at about 2.8% for the full year, an upgrade from the earlier 1.8% projection.
The first half of 2025 saw relatively strong dividend payments, partly compensating for the expected softness later in the year. Tax policy changes in the UK, such as dividend tax rates and ISA allowances, remain stable in 2025 and could influence after-tax income but not directly impact dividend forecasts.
Some blue-chip companies like Lloyds are expected to maintain or slightly grow dividends, with forecasts suggesting dividend yields around 4.38% in 2025. Companies with solid cash-flow cover, like TRIG, continue to support dividend sustainability in the near term.
The decline in headline dividends was primarily due to a halving of one-off special dividends to £2 billion. The top five dividend payers collectively paid £12.8 billion to investors in the second quarter, accounting for 36% of all dividends. HSBC leads the list of top dividend payers in the second quarter, followed by Rio Tinto, Shell, Playtech, and British American Tobacco.
Defence contractors and financials accounted for three quarters of the growth in dividends during this period. Banks and insurers also made a significant contribution to second quarter dividend growth. Mining stocks had the largest negative impact on dividends during the second quarter, with payouts falling 9.2%.
Sustained economic growth is key to driving up UK dividend payouts in the future, according to Computershare's report. The weakening dollar reduced the sterling value of payments declared in dollars by £934 million during the second quarter. Regular dividends were actually 6.8% higher at £33.1 billion, beating Computershare's forecast by £230m, when accounting for the special dividends and exchange rate factors.
Mark Cleland, chief executive of issuer services at Computershare, stated that the outcome was better than anticipated due to pockets of strength in a few sectors like finance and aerospace. Despite the slight decline in headline dividends, the underlying business strength continues to support UK dividends.
The finance sector, specifically defense contractors and financial institutions, experienced growth in dividends during the second quarter, contributing significantly to the overall Growth in UK dividend payouts. However, increased tariffs could potentially disrupt the investments within these sectors, necessitating careful financial management when assessing business prospects in the second half of 2025. As expected, the weakening dollar affected the sterling value of payments declared in dollars and led to a reduction in overall dividend payouts. Despite the slight decline in headline dividends, the underlying business strength, particularly in the finance and aerospace sectors, continues to support the UK dividends moving forward, offering potential opportunities for investing in promising businesses.
