Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.
The government’s campaign to get the nation investing is well underway - and where better place to start than in British stocks? After all, the FTSE 100 hit a record high this summer, and lots of its companies are very familiar.
Well, you might say, how about America, home to the world’s biggest AI companies? Or emerging markets, which have soared this year?
It’s a fair response. The UK is often presented as an investing backwater, behind the curve in terms of technology and capital.
But that’s only part of the story. The UK market boasts a range of established, globally competitive businesses - and many of them are going cheap. Indeed, as investment director Tom Stevenson points out in his latest Investment Outlook, the sectors that made the UK market unfashionable look more attractive in a world where capital once again has a cost. For both value and income hunters, therefore, there are still plenty of opportunities close to home.
Generous income
Dividends are a key part of the UK’s appeal. The FTSE 100 boasts a dividend yield of 3.5%, compared with the S&P 500’s 1.3% and Europe’s 3.3%. This means that London-listed companies return more cash to shareholders relative to their price than international rivals.
These figures do not include share buybacks, which have also been rising. Asset manager Schroders has christened the UK the “share buyback capital of the world”
UK dividends hit an all-time high in the second quarter of 2026, according to research by Computershare. Banks played a big part in this, growing dividends by more than a fifth year-on-year.
It is important to note, however, that just a handful of stocks are responsible for the lion’s share of payouts. In the second quarter of the year, five companies paid over 40% of all UK dividends. While concentration risk is often associated with markets such as the US, it is a feature of the UK market too.
Cheap stocks
One reason the FTSE 100 has a relatively high dividend yield is that many of its companies are mature and very cash generative. But it also reflects low share prices.
This is obvious in other valuation metrics too. For example, the UK trades on a forward price/earnings (P/E) ratio of just 12.1, compared with 21.5 for the US. This means investors are willing to pay a far higher price for future profits from American companies than from British ones.
Ultimately, when you’re assessing any valuation metric, you are making a call about growth. If investors think a region has the capacity to grow very fast, they will attach a higher P/E multiple to it. However, some people think the UK discount has become excessive.
The recent wave of takeover activity backs up this view. Tate & Lyle, Schroders, Intertek and Beazley, have all been plucked off the market this year by private equity firms or rival businesses, and easyJet and Segro have struck takeover deals. These buyers appear to see more value in UK companies than the stock market does.
As well as looking undervalued versus international rivals, the UK has started to look cheap versus its own history.
Potential AI hedge
The FTSE 100 has a very different sector mix from other markets. This is one of the reasons it has been unloved in recent years - it is more heavily weighted towards old economy sectors than technology. Technology represents about 2% of the FTSE 100 versus 40% of the S&P 500.
However, this may turn out to be a blessing in disguise if excitement around artificial intelligence starts to wane. Industries such as energy, utilities, consumer staples and healthcare tend to be more defensive than technology.
So far this year, we have already seen a slight rotation from growth to value as rising interest rates have reduced the appeal of unproven earnings in the future and made the UK’s cash generative stocks look more compelling. Conflict in the Middle East - and the resulting rise in the oil price - has also stoked interest in energy giants.
That’s not to say the UK is untouched by the AI boom. Almost 30 years after its IPO, Computacenter burst onto the FTSE 100 in June and has been the index’s best performer over the past year.
Computacenter helps companies buy, install and run their IT systems, sorting everything from cables to workplace laptops. AI has changed the game, with orders in North America more than doubling due to data centre building projects.
UK fund ideas
Deciding where best to invest in the UK can be a challenge, given the vast array of funds, investment trusts and ETFs currently available.
Fidelity’s Select 50 contains a manageable list of five hand-picked UK funds, each designed to produce growth, an income, or a combination of the two. It encompasses both actively managed and tracker portfolios.
Here, we have pulled together a summary of the Select 50 views. Please note that dividend yields are not guaranteed.
FTF Clearbridge UK Equity Income Fund
This is one of three actively managed UK funds on the Select 50 list. It is run by Franklin Templeton and aims to deliver market-beating income. Unsurprisingly, dividends are the big focus. The portfolio has between 40 and 60 holdings, and prioritises large, dividend paying companies. It doesn’t invest in bonds or derivatives to boost its income.
Top holdings include HSBC, Shell and British American Tobacco. It has an ongoing charge of 0.52% and a historic yield of 3.6%.
Fidelity Special Situations Fund
This fund, run by Alex Wright and Jonathan Winton, takes a contrarian approach, and focusing on unloved underappreciated UK companies. The portfolio is skewed towards medium- and smaller-sized businesses, but big names like Lloyds and Standard Chartered feature among its top holdings too. It currently leans towards industrial stocks, and the consumer discretionary sector. It has a historic yield of 2.2% and an ongoing charge of 0.91%.
- More on Fidelity Special Situations Fund
Liontrust UK Growth Fund
As its name suggests, this fund invests primarily in companies listed in the UK, although it may invest smaller amounts further afield. The fund has a 'quality' bias, leading it to companies that tend to be more expensive than others but with the potential for good growth. This approach has struggled in recent years, but could suit a long-term investor and blends well with a 'value' fund such as Fidelity Special Situations.
The historic yield has been a little lower than the other funds at 2.1% and the fund has an ongoing charge of 0.83%.
- More on Liontrust UK Growth Fund
iShares Core FTSE 100 UCITS ETF
This is a passive fund, also known as an index tracker. It holds the individual constituents of the FTSE 100 in the correct amounts to track the index. BlackRock, which runs the fund, is a seasoned investor in passive funds and this fund’s charges are extremely low. As such, it may suit cost-conscious investors with a longer time horizon. The yield is 3.1% and the ongoing charge is just 0.07%.
- More on iShares Core FTSE 100 UCITS ETF
Vanguard FTSE 250 ETF
This is another index-tracking fund, but it invests in mid-sized companies listed in the UK. Vanguard is an expert in index tracking and this fund is well priced, with an ongoing charge of 0.1%.
It is focused on mid-sized companies and represents a sensible choice on the riskier side of a portfolio. Mid-sized companies can be more volatile and riskier than their larger counterparts. The historic yield sits at 3.4%.
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). Select 50 is not a personal recommendation to buy funds. Equally, if a fund you own is not on the Select 50, we're not recommending you sell it. You must ensure that any fund you choose to invest in is suitable for your own personal circumstances. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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