Dividend yields on UK small-cap stocks will overtake the FTSE 100 giants in 2025, according to a new report by Octopus.
Income investors often gravitate towards these big payers, but Octopus forecasts that the FTSE Small Cap index will up its dividend yield to 4.33% next year while the FTSE 100 trails behind at 3.97%.
The report said: “This reinforces our view that some investors, [who are] comfortable with the additional associated risks, could benefit from looking more widely from the traditional FTSE 100 dividends stalwarts for equity income, instead considering a multi-cap approach.”
And UK small-caps’ overtaking of the FTSE 100 is a long time coming. The overall cash payouts by FTSE AIM companies has increased 68.4% over the past decade, dwarfing the 17.33% increase from the FTSE 100.
“This highlights the inherent potential in smaller, growth-oriented companies to materially grow cash dividends going forward,” the report added.
See also: UK dividends reach all-time high in Q2
Smaller companies have also been more resilient in recent years. The FTSE 100 has struggled to recover from its 2020 dividend cuts and still trails 11.8% behind pre-pandemic levels. The FTSE AIM index, on the other hand, has soared 44.97% over the same period.
Octopus also highlighted that the smaller end of the market comes with significantly less concentration risk than the FTSE 100.
The 10 biggest payers in this bucket account for over half (56%) of all its dividends, whereas the same group in the FTSE Small Cap index make up a lesser 30%. This drops even further to 22% in the FTSE 250.
“Investors should be cautious with regard to concentration,” the report said. “Many funds that take a traditional approach to UK equity income portfolio construction are likely to hold most of the top 10 FTSE 100 payers, resulting in considerable concentration risk.
“Including a multi cap approach could provide investors with much needed diversification from an income generation perspective.”
See also: Are income investors turning a blind eye to the world’s dividend powerhouse?
However, the outlook for all UK income investors is a positive one regardless of their market cap preference, with each index forecast to up its dividend yield next year, according to Octopus.
This, they say, will be helped by encouraging plans from the new Labour Government and the fact that high inflation and slow economic growth – two factors that have weighed heavily on UK equities in recent years – are “now behind us”.
The report added: “The new government has emphasised key messages around fiscal responsibility and growth, which could have a positive impact on UK equities.
“In comparison to recent history and developed market peers that are currently facing their own challenges, these conditions could act as a catalyst for renewed investment in the UK stockmarket.”
