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For investors looking to buy UK stocks as a means to earn passive income, dividends are often the first choice. But many dividend investors have likely spent the last few years feeling underwhelmed.
Data shows that dividend-focused indexes like the FTSE UK Dividend+ have lagged behind the broader market. For the past decade, it delivered a 30% lower total return than the FTSE 100 and FTSE 250 combined.
This is a real blow, especially for those hoping to supercharge a retirement portfolio through dividend reinvestment. By prioritising dividends, they may have lost out on the best gains.
But that situation looks to be changing, offering a once-in-a-decade opportunity for investors to capitalise. In 2025, the dividend index outpaced the top 350 FTSE-listed stocks by 1.3 times.
Could this be the start of an income stock resurgence?
UK stocks driving the surge
A ‘perfect storm’ of conditions helped send dividends stratospheric in 2025 — high interest rates, geopolitical unrest, and surging demand for commodities. These factors helped boost both finance and mining — two sectors known for their generous dividends.
Almost all banks, insurers, and miners enjoyed exceptional growth, boosting the total return on the FTSE UK Dividend+ index. Its top holding, Rio Tinto, returned 48% to shareholders, while major banks HSBC and NatWest returned 23.6% and 32% respectively.
A controversial pick
Finance and mining aside, another sector looks highly promising for dividend growth over the coming three years: tobacco. While British American Tobacco remains a leader in the field, key rival Imperial Brands (LSE: IMB) is looking increasingly attractive.
Naturally, tobacco stocks may not be everybody’s cup of tea – particularly as global smoking regulations tighten. There’s a growing risk that complete smoking bans in major cities could decimate key revenue streams.
But there’s also a strong argument that the shift toward less-harmful products is a more effective route than outright prohibition. These so-called ‘next-gen’ products (NGP) have delivered double-digit revenue growth for Imperial, narrowing losses toward breakeven and complementing core tobacco pricing power.
The company targets explicit 4% annual dividend growth for the next three years. This is supported by full-year 2026 forecasts of 8%-9% earnings growth and 3%-5% adjusted operating profit growth. Its dividend coverage is also more than sufficient, with a payout ratio of just 63.8% and 2.13 times cash coverage.
Other options
Strong dividend growth aside, many investors may be unconvinced by the less-harmful product narrative of tobacco. For those seeking dividend opportunities with a healthier angle, both Aviva and Primary Health Properties also deserve a closer look.
Each boasts strong dividend forecasts in the coming three years, with Aviva offering mid-single-digit growth guidance and Primary Health dedicated to its 30+ year unbroken growth streak.
With the FTSE UK Dividend+ Index hitting new highs after outpacing the FTSE 350 in 2025, there may be a rare once-in-a-decade chance to benefit. Many of its cash-rich dividend giants yield 5%+ and offer defensive income with 4%+ growth forecasts through 2028.
Amid rate cuts and overseas inflows, targeting sustainable payouts at fair valuations is a popular strategy to compound wealth for retirement.
