Dividend returns from small and mid-cap companies are set to outperform the FTSE 100 for the first time in a decade, according to new analysis.
Returns from FTSE Small Cap and FTSE 250 companies are projected to have higher dividend yields than London's blue-chip index, based on existing forecasts for 2025, the Octopus Investments dividend barometer report found.
Based on consensus market forecasts, the FTSE Small Cap is seen yielding 4.53% and the FTSE 250 excluding (investment trusts) is expected to achieve a yield of 4.46%, while the FTSE 100's is forecast to be 4.26%.
This shift underscores a "significant valuation disconnect" within UK stocks, Octopus said.
The report also noted that the FTSE 100 is forecast to have delivered dividend growth of 22% between 2015 and 2025, while AIM's cash dividend is forecast to have grown by over 82% in the same decade.
Octopus also highlighted dividend cover, which is a critical measure showing a company's ability to sustain its dividend payouts, or in other words how much a dividend payout is covered by profits or cash. A coverage ratio above 1.0 shows the dividend is covered, and over 2.0 shows a more secure dividend.
The FTSE Small Cap and FTSE 250 ex-IT indices are expected to offer better dividend cover, at 2.66x and 2.31x respectively, compared to the FTSE 100's 2.12x cover. This is the first such occurrence in five years, the report noted.
With the top 10 largest payers accounting for over half of all dividends, the concentration of dividend payers within the FTSE 100 remains a concern, Octopus said.
It is in "stark comparison to more diversified payouts in smaller indices" with the higher concentration of the blue-chip index posing "risks of over-exposure for investors relying heavily on the largest UK stocks".
Octopus publishes the research to highlight its FP Octopus UK Multi Cap Income Fund, where fund manager Chris McVey is among those investors who appreciate the dividend credentials of smaller companies.
"These entities not only provide better dividend prospects but also offer significant capital returns, especially as interest rates normalise,” he said.