Heading into 2026, British income investors should consider how a shifting economic environment could affect their dividend share holdings. The FTSE 100 still offers several attractive opportunities but potential changes are on the horizon — both positive and negative.
Subdued GDP growth, a cooling labour market and thinning dividend coverage are just a few factors I’m concerned about. But as always, some companies will weather downturns better than others.
The key is identifying which ones. But first, let’s see what we’re dealing with.
Implications for dividend sustainability
The Bank of England’s easing cycle will continue through 2026, with forecasts pointing to interest rates settling between 3% and 3.5% by year-end (down from 3.75% in late 2025). This creates a paradoxically challenging environment for dividend investors. While lower rates typically support better valuations and dividend stock prices, the underlying economic weakness driving those rate cuts poses risks to corporate earnings and dividend coverage.
With unemployment still higher than usual, the Office for Budget Responsibility expects sluggish GDP growth in 2026. For dividend investors, this economic backdrop means that earnings growth will likely remain modest, limiting dividend growth potential to 2% to 3% annually. Coverage-wise, the average ratio on the FTSE 100 is now around 1.99 times — only just below the historically recommended 2 times threshold.
So, with that backdrop, here’s my income strategy for 2026.
Minimising risk
To minimise my exposure to dividend cuts, I’m weighting my portfolio towards shares with defensive qualities. These are usually in the retail, consumer staples and utility sectors – companies that maintain high demand even when money is tight.
Take National Grid (LSE: NG), for example. The UK’s main gas and electricity supplier offers a combination of dependable income and structural growth that suits the current low‑growth, rate‑cutting environment. The shares yield around 4.1%, supported by a long record of progressive, inflation‑linked payouts. Apart from one minor cut last year, annual growth has been broadly in line with UK CPI, helping to preserve purchasing power over time.
But most importantly, it’s worth considering for its highly defensive qualities. As a regulated utility, most earnings come from electricity and gas networks with demand that’s far less cyclical than typical industrial or consumer sectors, making it attractive if UK growth remains sluggish through 2026.
One risk is that if energy price regulations change its profits could suffer. Plus, it racked up a fair amount of debt with network upgrades last year. For now, things look stable, but these are the kinds of risks to be aware of in uncertain times.
Other factors to consider
This year, I plan to avoid speculative high-yield income stocks that lack sufficient coverage. It may seem overly-cautious to focus on yields in the 4% to 5% range, but until things settle, it feels like the safest strategy.
Besides National Grid, other ‘safe’ stocks I’m looking at include Diageo, Aviva and Tesco. Although falling interest rates could hurt the insurance sector, Aviva’s conservative de-leveraging strategy promises a buffer. Meanwhile, both Tesco and Diageo are classic defensive picks with historically consistent dividends during economic downturns.
A diversified portfolio of dividend stocks from different sectors with a range of yields remains one of the most prudent methods to build durable, long-term passive income.
