Octopus Investments, an investment manager on a mission to invest in the people, ideas and industries that will change the world, today releases its bi-annual Dividend Barometer, which champions the lesser-known dividend qualities of smaller and mid-cap companies.
Whilst not the traditional area of focus for equity income investors, smaller companies continue to deliver attractive levels of dividend growth. Over the 10 years to 2025, overall cash payments have increased by 17.33% for the FTSE 100, whereas FTSE AIM has increased by a much more attractive 68.4%1. This highlights the inherent potential in smaller, growth-oriented companies to significantly grow cash dividends.
It is also worth looking again at how different markets are recovering in the wake of the pandemic, as many larger companies have yet to return to the same levels of payout. The FTSE 100 remains -11.8% below pre-crisis levels, whereas Total Cash Dividends Ex FTSE 100 are expected to be +9.2% above. FTSE AIM is the standout performer at +44.97% growth over the period in question2.
As for dividend yield, based on current forecasts, smaller companies offer more attractive yields than larger cap peers – looking ahead, the FTSE Small Cap is expected to be above FTSE 250 and FTSE 100 for 2025 – 4.33% versus 3.88% and 3.97% respectively3.
Alongside the yield and total cash paid, we have the important consideration of dividend cover. Dividend cover for the FTSE 100 is expected to rise to 2.3x for 2025, which may give investors more confidence that the level of dividend can be maintained. However, the FTSE Small Cap remains higher, with greater cover at 2.44x. The FTSE AIM is higher still, with forecast cover of 3.6x4.
This Barometer also shows that yet again, the FTSE 100 remains the most concentrated dividend index by far, with the top ten payers accounting for 56% of the total payouts. Therefore, many equity income investors will be materially exposed to the future dividend performance of a relatively narrow list of holdings. This is compared to 37% of the top ten payers for AIM, 33% for FTSE Small Cap, and only 22% for FTSE 2505. This means that investors looking outside of the FTSE 100 for equity income will benefit from materially better levels of diversification.
From a valuation perspective, the Barometer shows that the UK growth indexes of the FTSE AIM Index and the Deutsche Numis UK Smaller Companies (ex Investment Trusts) Index (DNUKSCxIT) are both due to deliver around 22% compound annual earnings growth. This percentage is very similar to the Nasdaq Composite Index, yet they trade on very different earnings multiples. FTSE AIM is trading on c13x price to earnings multiple, for example, slightly above the DNUKSCxIT on just 10.8x, whereas their US peer, the Nasdaq Composite Index, is trading on a lofty 23.9x multiple6. This demonstrates how UK growth equities are currently offering similar growth expectations to the much-celebrated Nasdaq, yet trades at a significantly discounted valuation multiple.
The Barometer also draws attention to the recent M&A activity that’s seen investors taking advantage of attractive valuations. The material bid premiums highlights the significant discount that UK growth equity markets are trading at compared to their true underlying value.
This all reinforces the view that investors looking for equity income could be casting the net more widely than the traditional FTSE 100 dividend stalwarts and instead should consider a multi-cap approach for income.
Chris McVey, Deputy Head of the Octopus Quoted Companies, comments:
“This edition of the Dividend Barometer is well timed, because a once-in-a-cycle opportunity to consider allocating to UK growth equities currently exists. Following the market bottom in October 2023, signs of recovery are emerging for UK growth equities.
“We can attribute this improvement to several factors positively impacting these markets, including an inflection in interest and inflation rates and the unexpected resilience of the UK economy.
“So, while the recovery is in its infancy, the opportunity for investors is ripe. Looking beyond the largest UK equity dividend stalwarts highlights smaller growth companies that have the potential to generate significant capital growth with attractive track records of paying consistent, and growing dividends.”
