Dividend Yield Explained: What FTSE 100 Income Really Tells UK Investors

Dividend yield is the annual dividend per share divided by the current share price, as a percentage. A £10 share paying 40p a year yields 4%.

Two consequences UK investors routinely miss:

It moves inversely to price. If the share halves and the dividend is held, the yield doubles. A soaring yield is frequently a falling share price, not generosity — the market pricing in a likely cut. A 9% yield is the market shouting a warning, not offering a gift.

It is backward- or forward-looking, and the two differ. Trailing yield uses the last 12 months of dividends; forward yield uses the next 12 months' forecast. For a company about to cut, the trailing figure is a mirage.

Yield tells you the current income rate. It tells you nothing, on its own, about whether that income will still be there next year. For that you need dividend cover.

Dividend cover = earnings per share ÷ dividend per share. It answers the only question that matters for income durability: is the company paying dividends out of profit, or out of borrowing and hope?

• Cover above ~2: comfortable — profit is roughly double the payout.
• Cover around 1.5: acceptable for a stable, cash-generative business.
• Cover below 1: the company is paying out more than it earns. Unsustainable without asset sales or debt. A yield resting on sub-1 cover is a cut waiting to happen.

This is why a 5%+ headline yield demands more scrutiny than a 3% one, not less. The discipline is the same one in our P/E ratio guide and balance sheet guide: never read one ratio without the one that checks it. A high yield with thin cover and rising net debt is the classic UK value trap in income clothing.

Here are real FTSE 100 dividend yields from our stocks data, set against the alternative that needs no analysis at all — the UK 10-year gilt at 4.82%:

The gilt line is the discipline. A share yielding 4% with equity risk and no capital guarantee is offering you less current income than a gilt that cannot default in sterling — you are only compensated if the dividend grows. That reframes the whole exercise: you are not chasing the highest yield, you are buying a growing, well-covered income stream that justifies taking equity risk over a guaranteed 4.8% gilt. AstraZeneca's sub-2% yield is not stinginess — it is a company reinvesting for growth. BAT's 5% must be tested against cover and debt before it counts as income rather than a warning.

Here is where after-tax reality overturns the headline. Outside a tax wrapper, the dividend allowance for 2026/27 is just £500 — slashed from £2,000 a few years ago. Dividends above it are taxed at 8.75% (basic rate), 33.75% (higher) and 39.35% (additional).

On a £30,000 portfolio yielding 4% — £1,200 of dividends — a higher-rate investor pays 33.75% on £700, around £236 a year, every year, rising as the portfolio grows. Inside a Stocks and Shares ISA that tax is zero. Permanently.

The arithmetic is decisive: a 4% yield sheltered in an ISA beats a higher unsheltered yield for most taxpayers once the £500 allowance is used. For income investors the wrapper is not optional housekeeping — it is the strategy. Use the £20,000 ISA allowance before reaching for yield outside it, and see the investing hub for building the income portfolio itself. FCA note: this is general information, not personal advice; dividends can be cut or cancelled and shares can fall in value.