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With UK stocks having surged ahead in 2025, the dividend yield offered by most index funds is pretty lacklustre in 2026. As of January, the FTSE 100’s yield stands at a modest 2.9%. And the FTSE 250 isn’t much better at 3.3%.
Considering the average payout has historically been closer to 4%, it shows that dividends aren’t growing as quickly as share prices. But luckily, there are quite a few exceptions.
Across the entire London Stock Exchange, there are 131 companies offering 6% or more. And when looking exclusively at the largest 350 businesses, there are still well over 40 stocks to choose from, with some payouts stretching as high as 12.9% right now.
Of course, not every high-yielding income stock’s a bargain. Investors have already seen how payouts from large-caps like WPP and Taylor Wimpey (LSE:TW.) can still be cut when times are tough.
So let’s explore how someone with £10,000 sat in an ISA can target a sustainable 7% dividend payout in 2026.
Cash is king
First things first. It’s important to remember that dividends serve as a mechanism to return excess capital back to the owners of a business. And in the stock market, the owners are the shareholders.
The keyword here is ‘excess’. Companies that don’t generate enough cash earnings to support their dividends are the ones most likely to start announcing payout cuts. That’s why free cash flow is the most important financial metric to watch.
Let’s take another look at Taylor Wimpey. On the surface, 2025 was a fairly robust year for the UK homebuilder. Its total completions increased year on year to 11,229 homes, while the average selling price also marched upward to £335,000. Subsequently, revenue was up just shy of 12%, reaching £3.8bn.
However, rising material and labour costs ate into profit margins, resulting in operating income remaining essentially flat at £420m. And with dividend coverage already stretched in 2024, shareholder payouts have started getting pulled back, with further cuts expected in 2026.
A potential rebound?
The latest analyst projections expect full-year dividends for Taylor Wimpey to reach 9.06p per share, down from 9.46p in 2024. But that still represents a substantial 8.5% dividend yield at today’s share price, firmly ahead of our 7% target.
Is this sustainable? Maybe. With the Bank of England steadily cutting interest rates, mortgages are becoming increasingly cheaper and more affordable for prospective home buyers.
With this improved affordability, Taylor Wimpey’s revenue may continue to climb on the back of this tailwind. And with inflation on raw material prices seemingly starting to stabilise, the company could enjoy superior free cash flow generation this year.
However, as with every investment, nothing’s ever guaranteed.
With greater exposure to the London & South East real estate market, Taylor Wimpey has notable exposure to parts of the country where home prices are deteriorating the fastest. Furthermore, even with lower mortgage rates, first-timer buyer demand could nonetheless stall as unemployment among younger generations steadily edges upward.
With that in mind, it may be prudent to wait for Taylor Wimpey’s next set of results before jumping in to better gauge its 2026 trajectory. Luckily, there are plenty of other income stocks offering high dividend yields to explore today.
