How dividends can work harder than you think

Dividends are often overlooked by investors but they can help them enjoy an additional revenue stream or build longer-term wealth. They are best described as sums of money that are paid out to shareholders by companies from the profits they’ve generated. These payments can either be withdrawn as income or reinvested to boost the value of someone’s overall portfolio and enable them to benefit from compounding.

Here we take a look at dividends, the benefits they provide, and how much companies are currently paying out to investors.

How do dividends work?

As mentioned, dividends are a way for companies to share some of their profits with investors that hold their stock. The level of payments – and how often they’re made – will be decided by the company’s board of directors and agreed at the annual meeting. While they can technically be paid at any time of the year, they are usually linked to a firm’s quarterly results. Special events, such as the sale of a division, may trigger extraordinary payments. Of course, while a company may have every intention of paying a set amount, changes in the economic backdrop may cause the dividend level to be cut – or axed completely.

Why do companies pay dividends?

Firms with track records of making stable and growing payouts are usually established businesses in their sectors and generate strong revenues. They are unlikely to be too focused on growth, otherwise they would be reinvesting the dividend money into the company to fund expansion plans. Such firms pay dividends for a couple of reasons. The first is to reward loyal shareholders and the second is in the hope of giving their stock price a boost. This is because potential investors may see the regular payouts as a sign of confidence in the business. This can lead to increased demand and a subsequent hike in the share price.

Current dividend trends: UK and global outlook

UK dividends

So, what type of companies are paying dividends – and how much have they been handing out to shareholders this year?

Let’s start by focusing on companies listed on the London Stock Exchange. The disappointing news is that total UK dividends fell 1.4% to £35.1 billion in the second quarter of 2025*. While underlying growth was strong – regular dividends were up 6.8% – one-off special dividends halved year-on-year to £2 billion*.

The biggest news was aerospace giant Rolls-Royce paying its first dividend since Covid-19 struck five years ago. In fact, its £508 million payout was larger than pre-pandemic levels*.

The banks were the largest paying sector in the period, accounting for almost one third of total dividends. Insurance companies also paid out more as higher premiums mean stronger profits. On the flip side, payouts from the mining sector tumbled 9.2%. Sector giant Rio Tinto cut its dividend in early 2025 as a direct response to weaker profits driven by falling iron ore prices*.

Looking forward, the 2025 forecast is for headline dividends to be cut by £1.8bn to £88.3bn. This would represent a 1.4% year-on-year fall*.

Global dividends

Global dividends grew to a record $1.75 trillion in 2024 (£1.3 trillion), up 6.6% on an underlying basis, according to the latest Janus Henderson Global Dividend Index**. 17 out of the 49 countries covered enjoyed record dividends, including major players such as the US, Canada, France, Japan and China. As far as sectors are concerned, financials accounted for half of 2024’s global dividend growth, with banks making the largest contribution in this area. However, telecoms, construction, insurance, consumer durables, and leisure were all among sectors to deliver double-digit increases. Mining and transport were the weakest.

It’s worth pointing out that a number of large companies – Meta, Alphabet and Alibaba – made their first dividend payments. Globally, 88% of companies either raised payouts or held them steady during 2024, while tech giant Microsoft remained the world’s largest dividend payer**.

Looking ahead, global dividends are expected to grow 5% in 2025 to reach $1.83 trillion**, with observers predicting company earnings will continue increasing.

Fund suggestions

You can buy shares in companies that pay regular dividends but opting for a diversified fund that invests in a variety of these stocks can help spread your risk.

Fidelity Global Dividend is a good example. As its name suggests, this is an income fund that invests in companies offering a healthy and sustainable dividend yield. This fund, which aims to pay a regular and growing dividend, as well as preserving capital, is unconstrained in terms of its country and sector exposure.

For more focused geographical exposure, there’s M&G North American Dividend. This is a concentrated fund that scours the region for companies that can reliably grow their dividends. John Weavers, the fund’s lead manager, is very experienced and has delivered excellent long-term performance with impressive consistency.

Another is Schroder Asian Income. It uses the company’s regional presence to find companies offering attractive yields and growing dividend payments. Closer to home, the WS Montanaro UK Income fund focuses on small and medium-sized businesses that offer an attractive dividend yield or the potential for dividend growth.

Read more: a three-minute guide to income funds

Spotlight: Why consider dividends in Asia?

Investors focused on growth may question why bother with dividend-paying companies – particularly in a vibrant region such as Asia. However, companies that pay high dividends are neither low growth nor boring, according to King Fuei Lee, co-head of Asian Equity Alternative Investments at Schroders. He pointed out that managers often only pay high dividends if they are confident that their future earnings are robust enough to sustain the payout.

“This explains why companies that pay high dividends today are routinely also the ones registering the fastest earnings growth tomorrow,” he said. Taiwanese chip foundry giant TSMC is a prime example. A linchpin in the global semiconductor space, the company’s earnings per share has increased sixfold over the last decade and a half.

“Yet unlike its peers who have used their capital expenditure needs as excuses not to pay their shareholders, the company largely ensured that its dividend payment profile was matching that of its anticipated future profits,” he added.

*Source: Computershare, UK Dividend Monitor, Q2 2025

**Source: Janus Henderson, Global Dividend Index, March 2025