Which sectors’ stocks are most likely to increase their dividends in 2025?

There are a number of sectors traditionally known for their dividend growth potential, and those stocks within them that might be poised for growth based on trends and forecasts. Read on to hear from a selection of our free-site writers…

Defence

By Royston Wild. Dividends from cyclical stocks could fail to grow next year if economic conditions remain tough. Even payouts from classic defensive stocks (like utilities and real estate businesses) might underwhelm if inflation is sticky and interest rates don’t fall much further.

As a result, I think the defence sector could be in the best shape to grow cash rewards.

Despite weak economic growth, Western spending on weaponry continues to surge, rising at its fastest pace since 2009 last year (according to the Stockholm International Peace Research Institute).

President-elect Donald Trump’s pledge to overhaul the US military could give sector earnings a further shot in the arm. Broader NATO spending is also likely to rise further, driven by substantial arms building in Russia and China.

In this landscape, I think blue-chip defence stocks like BAE Systems could deliver robust dividend growth as earnings and cash flows take off.

City analysts expect annual dividend growth at BAE to accelerate from 8% this year to 10% in 2025. To put that in context, analysts at AJ Bell think total dividends from FTSE 100 shares will rise just 1% in 2024 and then 7% next year.

Royston Wild does not own shares in any of the shares mentioned.

Electronics & Manufacturing

By Zaven Boyrazian. With higher inflation and interest rates putting pressure on consumers, demand for electronic products hasn’t been high in 2024. Even world-leading businesses like Apple have suffered from this, with lower-than-expected performance in its new iPhone 16.

However, as economic conditions and technology improve, there’s growing potential for a new wave of device upgrades in the not-to-distant future. Looking at the global purchasing manager’s index for manufacturing, demand seems to be steadily coming back. And as the cycle shifts back into expansion, earnings and, in turn, dividends could be set to surge in 2025 and beyond.

In the UK, quite a few businesses, such as RS Group and Diploma, are positioning themselves to profit from the eventual cyclical change. The exact timing of when demand will bounce back is still uncertain, creating the risk of potentially investing too early, resulting in lacklustre short-term performance. But with pound-cost-averaging, this risk can be mitigated.

Zaven Boyrazian doesn’t own shares in the companies mentioned.

Industrials

By Stephen Wright. There’s obviously a lot of interest in the tech sector at the moment. And I think that’s reasonable – artificial intelligence (AI) is starting to make a meaningful difference to how people do things.

Despite this, I think the sector most likely to increase its dividends in 2025 is industrials. There are three main reasons for this. 

One is there are a lot of the firms that have strong dividend records in this sector. I have in mind the likes of Diploma and Halma in the UK and CSX and Norfolk Southern in the US.

Another is I think the sector stands to benefit from the rise of AI. Being able to operate more efficiently and use data more effectively should help businesses bring down costs. 

The third is I expect economic growth on both sides of the Atlantic in 2025. And this is something that should benefit the industrial businesses that make industry happen. 

Stephen Wright owns shares in CSX and Norfolk Southern.

Tobacco

By Mark David Hartley. The tobacco industry has long been a consistent dividend payer and looks to continue that trend into 2025. Several leading tobacco companies have been increasing their dividends for over a decade even in the face of falling tobacco sales. 

Now the future of the industry relies heavily on reduced-risk products (RRPs), such as vapes and nicotine pouches. Increasingly strict smoking laws have limited sales of traditional cigarettes, reducing profits and increasing debt within the industry. If companies don’t find new ways to increase sales in RRPs they risk becoming unprofitable and defaulting on their debt obligations.

British American Tobacco is one example. It’s currently unprofitable but continues paying dividends, with a yield of around 8%. Revenue is forecast to decline in the coming year, while earnings may increase slightly due to cost-cutting efforts. The price is forecast to remain flat for the next 12 months while dividends are expected to rise 4.7%.

Mark David Hartley owns shares in British American Tobacco.

Tobacco

By Christopher Ruane. Declining demand, regulatory pressure and litigation costs. The picture for tobacco two decades ago was gloomy. Those pressures have grown since.

Yet, British American Tobacco has raised its dividend per share annually since the last century. US peer Altria is a Dividend Aristocrat.

Past performance is not necessarily a guide to the future. Imperial Brands slashed its dividend in 2020 following years of double digit increases in the dividend per share.

Imperial’s cut could be seen as the canary in the coalmine. Declining cigarette sales volumes make it increasingly difficult for tobacco companies to keep raising dividends.

Nonetheless, I expect the sector to keep increasing dividends in 2025.

Why?

The sector is in structural decline and sells a product with nasty and potentially fatal consequences for customers. The investment case therefore relies heavily on dividends. Listed tobacco companies clearly understand that.

With strong brands, pricing power and an addictive product, I think the sector still has a significant future.

Christopher Ruane does not own shares in any of the companies mentioned.