A longer version of this article was originally published on Citywire.
Time income investors looked to smaller companies
Traditionally, income-seeking investors in this country have turned to the FTSE 100 – home to many of the UK’s big beasts. These are established, profitable companies capable of paying excess cash back to shareholders via an attractive dividend yield.
But things have changed. In the run-up to Covid many FTSE 100 companies were arguably over-distributing. The dividend payout ratio crept past 60%. Company boards didn’t want to lose their records of maintaining and growing dividends, but it was restricting their ability to invest for the future.
Covid provided an opportunity for established dividend payers, like Shell, to reset by cutting their dividends. The average yield of FTSE 100 companies now stands at ~3.5%, compared to a 10-year average of 4.3%. Unusually, the FTSE 250 now offers a higher dividend – 4.6%.
Why is that? It’s worth remembering that a dividend “yield” is the amount paid in dividends per share as a proportion of the share price. So the strong share-price performance of the FTSE 100 has helped weigh down on the yield.
Meanwhile, scepticism around the strength of the UK economy and caution from UK investors have hit sentiment towards smaller companies more than larger, more international ones. As a result, share prices of small companies have underperformed, even though many companies have managed to maintain dividends. That means the yield has risen. We think it’s a reflection of the great value to be found in this part of the UK stock market. If you’re selective you can find some outstanding companies here.
They may not all be glamorous but many have generated very good returns over the long term by investing consistently to grow. That reinvestment is important and reminds us that a ‘healthy yield’ is one that’s sustainable too. Thankfully, there are several areas in which we can find businesses that fit the bill.
Take retail. Dunelm, for instance, has steadily grown market share in the UK over time and has ambitions to go further. It has indicated that it will spend about £50m1 in 2026 on store expansions and acquisitions and yet is still offering an ordinary dividend yield of around 4% (it often tops this up with a special dividend as well). This is a company that’s more than doubled its net income since 2018 and nearly doubled profits2.
The FTSE 250 is home to several smaller strong industrial businesses. Johnson Service Group, which is among the leaders in UK textile rental for restaurants, hotels and gyms, has continued investing organically and in small acquisitions. Elsewhere there are companies like Zigup (~7.5% dividend yield), which offers van rental and is in the process of upgrading its hire fleet. Or there’s Norcros (just under 4% yield), a leader in UK bathroom products, which is undertaking modest acquisitions to expand its product portfolio. Shares in these companies look modestly priced by most valuation methods.
None of the above are stock recommendations, but they hopefully serve to illustrate that the UK has plenty of companies beneath the FTSE 100 that are growing, market-leading businesses that trade on reasonable valuations and pay an attractive dividend yield.
Lowland is a multi-cap income fund. That basically means we can seek income from among large and small companies alike. At a time like this, that flexibility seems to me to be a great feature of the trust.
Laura Foll is co-manager of the Lowland Investment Company
Sources:
- https://finance.yahoo.com/quote/DNLM.L/earnings/DNLM.L-H2-2025-earnings_call-357489.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAMQl7OqKh-RK6bLPnHMWbPIgFpDay5cgrreJl60OYN78zGrzJDAN8jzftupz65EVJ8-XLoh5pfmJEIS2BNHi
- https://www.fidelity.co.uk/factsheet-data/factsheet/GB00B1CKQ739-dunelm-group-plc/financials
Bloomberg 16 December 2025, unless otherwise noted
| Discrete year performance (%) |
Share price (total return) |
NAV (total return) |
| 31/12/2024 to 31/12/2025 |
35.3 |
31.4 |
| 31/12/2023 to 31/12/2024 |
4.4 |
8.1 |
| 31/12/2022 to 31/12/2023 |
9.1 |
8.9 |
| 31/12/2021 to 31/12/2022 |
-5.2 |
-5.7 |
| 31/12/2020 to 31/12/2021 |
16.3 |
23.9 |
All performance, cumulative growth and annual growth data is sourced from Morningstar.
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