Can record dividends help the FTSE 100 outrun gilt yields?

This article uses data from our quarterly Dividend Dashboard report which looks in more detail at the biggest dividend payers and growers.

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Heightened tensions in the Middle East, concerns over the UK’s fiscal situation, and sticky inflation are all feeding into government bond yields, which stand within a whisker of the highest level since 2007, using the 10-year gilt as a benchmark.

This is in turn acting as a brake on the FTSE 100, which is making heavy weather of recapturing February’s all-time closing high of 10,911 as the gilt yield exceeds the FTSE 100’s dividend yield by more than two full percentage points.

At the time of writing, the 10-year gilt yield is above 5.4%, while the dividend yield on the FTSE 100 for 2026 is 3.3%, based on aggregated consensus forecasts for all of the index’s members. Any investor who is nervous about the economic outlook and feels that inflation is not about to break out on the upside could start to look toward fixed income and away from equities as a result, especially if they feel their portfolio needs a little capital protection, given how gilts redeem at par upon maturity.

Case for equities not lost

However, the case for equities is not lost. Earnings forecasts for the FTSE 100 have started to flatline amid worries over the wider implications of any sustained increase in oil and commodity prices, thanks to the ongoing stalemate in the Strait of Hormuz, fresh hostilities in the Strait of Bab al-Mandab that leads ultimately to the Suez Canal, and long-term lack of investment in fresh drilling and exploration work.

Nevertheless, consensus earnings forecasts for the FTSE 100 put the benchmark index on 13.5 forward earnings for 2026 for an earnings yield of 7.4%, a figure which still bears close comparison to gilts.

Dividend payment forecasts continue to creep higher, too, and analysts now expect the total payment from the FTSE 100 to reach an all-time record £90.3 billion in 2026, up from a forecast of £88.8 billion just three months ago.

Management teams also continue to sanction share buybacks. The total value of the plans declared for this year is now £46.7 billion. Adding that sum to analysts’ forecasts for ordinary and special dividends takes the cash return on the FTSE 100 to £138 billion, equivalent to 5.1% of the index’s £2.7 trillion stock market capitalisation.

Takeovers continue apace

Takeovers could top up the pot, too, if deals for DCC, Beazley, Intertek, Schroders and SEGRO go through, given their aggregate value of £46.8 billion.

Those deals support the argument offered by equity bulls that UK stocks still offer good value in absolute and relative terms, given how the total cash yield on the FTSE trails the 10-year gilt by just 30 basis points (0.3%), and the potential for share price upside, should earnings forecasts prove accurate and takeover bids keep rolling in. The UK’s cash and earnings yields also handily beat both the Bank of England base rate of 3.75% and the 3.1% rate of inflation reported by the Office for National Statistics for the month of August.

Further gilt yield increases, should inflation prove sticky, the autumn Budget a flop or investors prove more risk averse in the event of any artificial intelligence-related turbulence, could still be a challenge to the FTSE’s bid to break the 11,000 mark all the same. Just as weight stops trains and slows down racehorses, higher bond yields eventually weigh on share prices, thanks to the mathematical calculations of their relative risk-reward profiles.