Investment manager Octopus Investments sees a “once-in-a-cycle opportunity” to invest in UK growth equities.
As the firm releases its bi-annual Dividend Barometer, it said smaller companies continue to deliver attractive levels of dividend growth and have the potential to generate significant capital growth, despite not being the traditional area of focus for equity income investors. Over the 10 years to 2025, overall cash payments have increased by 17.33% for the FTSE 100 and 68.4% for FTSE AIM.
Octopus Investments said the recovery of markets in the wake of the pandemic also shows smaller companies faring better.
Looking ahead, the FTSE Small Cap is expected to be above FTSE 250 and FTSE 100 for 2025, reaching 4.33% versus 3.88% and 3.97% respectively.
Chris McVey, deputy head of Octopus Quoted Companies, said: “This edition of the Dividend Barometer is well timed because a once-in-a-cycle opportunity to consider allocating to UK growth equities currently exists. Following the market bottom in October 2023, signs of recovery are emerging for UK growth equities.
“We can attribute this improvement to several factors positively impacting these markets, including an inflection in interest and inflation rates and the unexpected resilience of the UK economy.”
Octopus said the Barometer showed that the FTSE 100 continues to be the most concentrated dividend index, with the top ten payers accounting for 56% of the total payouts. This means many equity income investors will be materially exposed to the future dividend performance of a relatively narrow list of holdings, the group said. This compares to 37% of the top ten payers for AIM, 33% for FTSE Small Cap and only 22% for FTSE 250.
The Barometer showed that the UK growth indexes of the FTSE AIM Index and the Deutsche Numis UK Smaller Companies (ex Investment Trusts) are both due to deliver around 22% compound annual earnings growth, very similar to the Nasdaq Composite Index. Octopus said UK growth equities are currently offering similar growth expectations to the Nasdaq, yet trading at a significantly discounted valuation multiple.
McVey added: “While the recovery is in its infancy, the opportunity for investors is ripe. Looking beyond the largest UK equity dividend stalwarts highlights smaller growth companies that have the potential to generate significant capital growth with attractive track records of paying consistent, and growing dividends.”
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