Pressure mounts on high-dividend UK stocks regarding payout distributions
The second quarter of 2025 saw UK companies distribute dividends totalling £35.1 billion, a 1.4% decrease year-on-year. Despite this decline, the outlook for UK dividends in 2025 remains cautiously optimistic.
A significant contribution to the second quarter dividend growth came from banks and insurers, with their dividend payouts increasing by 8.1% and 15% respectively. Financial institutions and defense contractors accounted for three quarters of the growth in dividends during this period. Notable contributors included Rolls-Royce, which paid its first dividend since the pandemic, and HSBC, which topped the list of dividend payouts.
However, a proportionally large 22% of companies cut their dividends year-on-year. The weakening dollar reduced the sterling value of payments declared in dollars by £934 million during the second quarter. Mining stocks had the largest negative impact on dividends, with payouts falling 9.2% during the second quarter. Rio Tinto, one of the top dividend-paying companies, cut its dividend in early 2025 due to weaker profits caused by falling iron ore prices and rising production costs.
Looking ahead, Computershare has cut its forecast for 2025 dividends by £1.8 billion. After stripping out exchange rates and one-off special payments, Computershare now projects an underlying increase of 2.8% for the full year, delivering regular dividends of £85.1 billion in 2025. 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.
The median growth in company payouts was 4.1%, just ahead of inflation but relatively modest. Sustained economic growth is key to driving UK payouts higher again, according to Computershare. However, rising UK taxes and ongoing economic uncertainty are challenging corporate profitability and dividend payments. The UK economy is expected to grow modestly at about 1.1-1.2% in 2025, with inflation around 3.2%, but risks remain from tighter financial conditions and global trade uncertainties.
Investors should remain mindful of ongoing risks that could affect payouts and market performance. Despite the challenges, some UK dividend-paying sectors and stocks, such as tobacco, precious metals, and consumer products, have shown resilience and strong dividend yields in 2025, supporting steady income for investors. Diageo, a major UK dividend payer, shows steady but largely flat dividend growth projections through 2027, reflecting cautious optimism.
In summary, while headline dividend payouts in the UK face pressure from taxes, economic uncertainty, and exchange rate effects, underlying dividend growth is expected to be positive but modest in 2025. The combination of stabilizing political conditions and moderate economic growth supports this cautiously optimistic dividend outlook.
- Personal-finance managers might consider investing in sectors like finance and aerospace, as they have shown pockets of strength and are expected to contribute to positive, albeit modest, underlying dividend growth in 2025.
- Tariffs could potentially impact the finances of UK businesses, given the weakening dollar reduced the sterling value of payments declared in dollars by £934 million during the second quarter, affecting sectors like mining, which saw a 9.2% decrease in dividends.
- In an environment marked by ongoing economic uncertainty and rising UK taxes, investors should be aware of the risks affecting payouts and market performance, but they could also find opportunities in dividend-paying sectors like tobacco, precious metals, and consumer products, which have shown resilience with strong dividend yields in 2025.
