UK equities: income and total return

Key takeaways:

• The UK is known for its dividend culture, offering yields that are attractive compared to those available internationally.
• Income and total return investing come hand in hand. Employing a yield premium approach requires a consistent strict valuation focus, ensuring a total return approach.
• Yield is available across diverse sectors within the UK market, allowing you to prioritise investing in quality companies with compelling valuations, sustainable payouts, and growth potential.

The UK market is famous for its dividend culture, but that’s just the beginning of its appeal. After five years of double-digit total returns in UK equities and, following many decades of investing in these markets, we believe that adopting a balanced investment strategy, one that targets both income and total return is a winning formula for success with UK equities.

Attractive UK Yields

The UK is known for its generous approach to dividends, but I think it’s worth stating how this stacks up globally.  Quite simply, most developed markets offer a lower yield. So, while the FTSE 100 yields around 3.5%, this compares to 1.3% in the US and just over 1.8% globally¹. This makes the UK’s yield premium a compelling building block for your returns.

It’s also important to recognise that yield in the UK is not confined to large cap stocks, especially at this stage in the market cycle.  Mid cap stocks currently offer exceptional valuation opportunities and comparable yields with their larger UK counterparts, with the FTSE 250 ex Investment Trusts yielding 4.1%¹. The ability to invest across the market cap spectrum provides more options for active managers looking at income and total return.

Appealing capital returns

Going back to first principles, there are several factors that contribute to your total return including dividend payments, share buybacks, earnings multiples and earnings progression.  Some of these are interrelated – for example share buy backs mechanically improve earnings progression. 

At a fundamental analysis level, the dividend yield is a valuation metric largely linked to earnings yield.  UK corporate earnings growth is forecast to surpass 7%¹ for the year ahead which, supported by the current surge in share buybacks, is helping drive shareholder returns. On top of that, current valuations make this market more attractive than ever.

Diverse dividend opportunities

High-yield stocks in the FTSE All-Share often trade at attractive valuations, enabling you to invest for capital growth alongside income. Interestingly, the attractive dividend yields on offer in the UK is not limited to a select number of sectors or stocks. Yield is available across diverse sectors, including cyclical stocks that frequently carry a yield premium. This market dynamic means you don’t need to “reach for yield” by chasing unsustainable dividends. Instead, you’re able to flexibly employ an approach that prioritises quality companies with compelling valuations, sustainable payouts, and growth potential. This enables portfolio construction that delivers above benchmark income without sacrificing capital growth.