Boring but beautiful: UK income investing in 2025

The FTSE 100 briefly topping the symbolic 9,000 level has got a few pulses racing. Are investors finally starting to appreciate the overlooked charms of the UK stock market? The key advantage of the UK market is that whether it is on the cusp of a revival or not, its chunky dividend yield means investors are paid to wait. This is the often-ignored selling point of UK companies.

Over the years, the power of dividends in the UK market has been extraordinary. An investor in the FTSE 100 in 1985 who withdrew and spent their dividends would have seen their capital grow from £10,000 to £62,020*. That feels like a pretty unexciting return. If they had reinvested those dividends, however, they would now have a pot of £278,400* – almost five times as much. Income has been a steady and dependable part of investing in UK equities.

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.

The UK market still compares favourably to its peers for income. The FTSE 100 has a yield of 3.4%**. In contrast, the yield on the MSCI World is just 1.7%***. The FTSE North America index yields an anaemic 1.3%** - the downside of its dominance by a bunch of low-yielding technology companies. Japan and Europe fare slightly better, with the FTSE Japan yielding 2.4%** and the MSCI Europe yielding 3%***, but the UK still gets the crown.
The argument against UK income funds is that they can be a bit stodgy. This has some merit. Over half (54%) of the income in the UK market comes from just five companies – AstraZeneca, Shell, British American Tobacco, BP and Unilever****. These are good solid companies, but may not set the world on fire in the same way as, say, Nvidia. 83% of the income comes from the top 15 companies****. That brings in companies such as renewables giant SSE, Associated British Food or Compass Group, but if they were a boyfriend, they would still fall on the boring and dependable side rather than the drives-a-motorbike side.

That said, active managers don’t need to invest in these giants if they don’t want to. There is also plenty of income available in the UK small and mid-cap companies. The FTSE 250 now has a yield as high as the FTSE 100. The FTSE Small Cap yield sits at 3.8%**. These high yields are elevated relative to history and are a reflection of a significant period of weakness for this part of the market (yields are given as a percentage of the share price, so if the share price falls, the yield rises).

UK income managers are increasingly gravitating to this part of the market. The VT Tyndall Unconstrained UK Income fund, for example, which is a ‘go anywhere’ fund, but is increasingly focused on this part of the market, with manager Simon Murphy believing there is a generational opportunity there: “In my career, I’ve never seen so many companies – good decent quality businesses – that trade on PE ratios of 7/8x and dividend yields of 5-7%. They are generationally cheap.”

He believes investors need to look beyond the gloomy headlines about the UK economy. “The private sector in the UK is in a good place, but we’ve lacked some confidence – to invest if you are a company, or to spend if you are a consumer. A period of calm and stability should see the UK economy perform just fine.”

Guido Dacie-Lombardo, manager of the Montanaro UK Income fund, also makes the case for smaller companies for income. He says: “Despite a strong quarter for small caps, valuations remain well below historical averages and international peers, representing a compelling investment opportunity. This is increasingly being recognised by both private equity and trade acquirers, resulting in an accelerated pace of takeovers in the market. In addition, the pace of buybacks is the strongest it’s been in a long time, suggesting Boards are also seeing buying opportunities. Indeed, over a quarter of the Fund’s holdings are actively buying back shares.”

With an average market capitalisation in its holdings of just £1.5bn^, the Montanaro fund has a yield of around 4%, well ahead of the FTSE All Share at c. 3.6%^. Dacie-Lombardo believes this is “remarkable”, given the relative growth prospects. “We believe it further underpins the valuation opportunity for the Fund and for SmallCap in general”.

Nevertheless, Carl Stick, manager of the Rathbone Income fund, gives an argument for the UK’s larger companies, believing they offer a welcome dose of stability at a time when there is plenty of chaos in the UK market.
He says: “Our holdings include consumer staples (Unilever, Reckitt Benckiser, and British American Tobacco), utilities (National Grid, SSE), pharmaceuticals (GSK, AstraZeneca) and food retailers (Tesco, Sainsbury). These companies offer stable revenues and earnings, making them attractive amid uncertainty.” He adds that when global markets face volatility, the UK can provide a relative safe haven and investors can lean in to that.

While he remains quite defensively positioned, he believes economic and political trends appear to be aligning more favourably for the UK and the growth narrative from the UK government is starting to take shape. “We’re excited that the narrative around investing in the UK is beginning to change: we’re starting to hear greater anecdotal support for this view.”

In the UK market, investors can get excited about the potential for a recovery, but they also have the cushion of an attractive income should it be slow to materialise. This income can be found across the UK market – from solid, stable large-caps to the UK’s dynamic small companies. It may be a time to rediscover UK equities again.

*Source: figures provided by Rathbones, quarterly data from 31 December 1985 to 30 June 2025
**Source: Morningstar, 16 July 2025
***Source: index factsheet, 30 June 2025
****Source: computershare Q1 2025, UK Dividend Monitor
^Source: fund factsheet, 30 June 2025

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.