Why UK income investing still makes sense

The latest UK Dividend Monitor report from Computershare paints a somewhat underwhelming picture for income investors. It notes that the FTSE 100 is likely to deliver a yield of 3.8 per cent in 2025, something that compares poorly with 4.6 per cent from a 10-year UK government bond or a rate of nearly 4.9 per cent on a cash savings account, and that the dividend outlook is "muted" this year.

While bonds and cash look competitive in terms of what they pay you, UK income investing still makes sense as a way of not just getting dividends but also a decent total return and a payout that grows over time. But from a funds perspective, the way you tap into this can take a variety of forms and make a big difference to overall returns.

Investors who want to take a passive approach have plenty of good options, but even here not all are alike. A FTSE 100 exchange traded fund (ETF) comes with a trailing 12-month yield of about 3.6 per cent and gives you exposure to a market heavy with the likes of financials and consumer staples companies. But investors can opt to focus even more closely on dividends: the iShares UK Dividend ETF (IUKD) comes with a trailing yield of 5.7 per cent, for one. It achieves this partly by having a much chunkier allocation to financials, which account for nearly 36 per cent of the portfolio, compared with 23 per cent of a FTSE 100 tracker.