UK Stocks Gain Ground on Strong Cash Returns

The UK’s FTSE 100 is making waves in 2025, outperforming the US’s S&P 500 and delivering strong returns despite slowing dividend growth and softening profit forecasts. With a weaker dollar, robust buybacks, investors are taking a fresh look at the UK equity market.

In 2025, according to AJ Bell, a UK-based brokerage firm, the FTSE 100 has outperformed the S&P 500, delivering a total return of 9.6% compared to the S&P’s 2.1%. While dividend growth has slowed, the pound has remained strong against the dollar, and the UK market continues to trade at a discount to its US counterpart. Despite falling profit forecasts, the FTSE still offers a 3.5% dividend yield, supplemented by aggressive share buybacks - £39 billion declared in the first quarter alone, following a record £58.3 billion in 2024.

Combining projected dividends of £80.4 billion with expected buybacks, the FTSE 100 is on track to return £119.4 billion in cash to shareholders in 2025. Though no special dividends have been declared yet, M&A (Mergers and Acquisitions) activity could boost returns further, with £20 billion in bids already tabled this year. This substantial cash flow reinforces investor confidence and offsets the £3.5 billion raised via new share offerings so far.

Source - AJ Bell

When it comes to companies expected to increase their dividends, AJ Bells shows that NatWest leads dividend growth with an increase of £532 million, followed by Unilever (£210 million) and Admiral (£177 million).

Other names to watch for dividend growth include:

• Fresnillo - £151 million forecasted increase
• GSK - £145 million
• Rolls-Royce - £145 million
• Lloyds - £129 million
• BAE Systems - £88 million
• Barclays - £75 million

“If anything, history suggests that it is dividend growth that is the real nectar for share price, as a growing pay-out will drag it higher over time,” AJ Bell’s Investment Director said.

Conclusion 

The FTSE 100 continues to attract investors through its attractive valuation, solid dividend yield, and substantial shareholder returns driven by buybacks. However, slower dividend growth, weaker profit forecasts, and downside risks from lower interest rates and falling commodity prices could pressure returns, particularly in financials and mining. This may lead to reduced income and share price volatility for investors focused on these sectors, potentially creating attractive entry points for new investors. 

With ongoing M&A activity and a balanced mix of cyclical and defensive sectors, the FTSE could still offer a compelling opportunity for income and growth, potentially making it well positioned for investors seeking diversification and inflation protection.

Sources – EasyResearch.

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Government bonds offer a reliable way to earn fixed income by lending money to the government in exchange for regular interest payments. 

Dividends are one of the many key components of investing, representing a share of a company's profits distributed to its shareholders. 

Special dividends, also known as extraordinary dividends, are one-time payments made by companies to shareholders due to specific financial events, like windfall profits or asset sales.