Chupongrid desk · Harrow
Large companies and the rest of the list
The FTSE 100 generates most of the cash dividends paid by the UK market. Energy, financials, consumer staples and healthcare have long been heavy contributors. A portfolio that simply collects the biggest sterling payers can end up as a bet on those sectors twice: once through the companies, and again through any "UK equity income" fund that holds the same names.
The FTSE 250 is a different income story. Yields are often lower, dividend growth more uneven, and the link to the UK domestic economy tighter. Neither index is a recommendation. They are maps of where the dividends currently come from, and maps go out of date when a large payer cuts.
Investment trusts and a reserve
An investment trust is a company whose business is holding a portfolio. It is closed-ended: you buy the shares from someone else, not from the trust itself, so the price can sit at a discount or a premium to the value of the underlying holdings. That gap moves. A discount getting wider is a price fall even if the assets have not.
Trusts can keep revenue in reserve and use it later, which is why some have raised their own dividend for many years in a row even in years when the portfolio's income dipped. The Association of Investment Companies publishes a "dividend heroes" list of trusts with long records of raising payouts. It is a research index of history, not a shortlist from this desk. A long record did not protect every trust from a cut when revenue reserves ran down or when the board changed policy.
Gearing, borrowing to invest, lifts both the income and the fall. A trust factsheet shows the gearing figure. Read it next to the yield, not after you have already decided the yield is the point.
REITs and property income distributions
A UK real estate investment trust pays property income distributions, usually called PIDs, out of its tax-exempt property rental business. A PID is not a dividend for income tax. It is taxed as property income. It does not use the £500 dividend allowance. Basic-rate tax is often taken off before you receive a PID held outside an ISA, commonly at 20%, unless an exemption applies.
Inside a stocks and shares ISA, a PID is sheltered from UK tax in the same way as other ISA investments. That difference, wrapper or no wrapper, is larger for PIDs than for ordinary dividends because of the withholding. Some REIT payments are a mix of a PID and an ordinary dividend. The voucher splits them. If you file, the split matters.
Income funds that never pay you
A fund or trust labelled "income" may still be held as accumulation units, or the dividend may be small relative to the yield you saw advertised on a different share class. Always check the specific unit you bought: income or accumulation, currency, and whether it hedges.
Also check what the quoted yield includes. Some products distribute capital as well as income. A payment that includes a return of your own capital will feel like income and will slowly change what you have left invested. The report and accounts, not the yield badge on a portal, is where that is disclosed.
A practical reading order
- Identify the vehicle: operating company, investment trust, REIT, or open-ended fund.
- Identify the coupon: ordinary dividend, special, PID, or a mix, and the currency it is declared in.
- Identify the calendar: interim and final, or quarterly, and the next ex-dividend date.
- Identify the wrapper: dealing account, ISA, or pension. The tax page is the companion to this one.
- Only then compare the yield with anything else. Otherwise you are comparing different taxes and different contracts.