After making a spectacular recovery, Rolls‑Royce (LSE: RR.) started paying dividends on its shares again in 2024. At its peak in 2014, it was paying a full-year dividend of 7.93p per share – but even before the pandemic, minor cuts had begun.
Then, when Covid hit in 2020, they were paused entirely.
By the end of 2024, the stock had soared over 700%, and the dividend was reintroduced at 6p per share. The first interim dividend of 4.5p has already been announced for 2025, suggesting that upcoming dividends are likely to increase substantially.
Let’s take a look at the forecast for 2026 and beyond.
Steady growth expected
The company’s turnaround under chief executive Tufan Erginbilgic has been nothing short of impressive. Rolls-Royce has benefitted from the resurgence in global air travel and rising defence spending, with profits surging across its civil aerospace and defence divisions.
Analysts expect a full-year dividend of around 9p per share for 2025, followed by 10.6p in 2026 and roughly 12p in 2027. Forecast earnings per share (EPS) are expected to rise to 26p next year, keeping the payout ratio at around 33%.
That indicates the dividend is well covered, with further growth potential if performance continues at the current pace.
From a risk perspective, one key area to weigh up is how much Rolls-Royce’s performance depends on macro conditions. Factors include global air-traffic recovery, defence budgets and supply-chain stability. The company’s earnings could be derailed if one of those factors falters.
The current share price appears to reflect much of the expected recovery, so the margin for error may be limited.
Is it a good income option?
For a dividend to rise from 6p to nearly 10p over two years is impressive. But with the share price having already run up, the yield stays far below average. Income-seekers tend to expect yields well in excess of 3% or 4%, yet here the yield hovers close to 1 %.
Unless the share price falls, the yield isn’t likely to move much higher. In other words, to earn a meaningful income from Rolls-Royce shares, an investor would need to hold a large position.
On the positive side, Rolls-Royce has the earnings leverage to push dividends higher and the market appears willing to accept that narrative. Its recovery is credible and the company is in a much stronger place financially than during the pandemic years.
Buying at today’s level may mean the immediate income return is low – the reward lies more in what might come rather than what one gets now.
What this means for investors
For investors already holding Rolls-Royce shares, the dividend forecast offers encouragement. But for new investors, buying at this level with the aim of immediate high income might disappoint. Dividend hunters aiming to boost their portfolio’s average yield could find more attractive options on the London Stock Exchange.
Still, its recovery has been nothing short of remarkable, so I think it remains a solid stock to consider. Even if growth slows temporarily and the yield remains modest, I expect the business to perform at an above-average level.
