What Are Dividend Stocks? A Guide to Passive Income from UK Shares

When people talk about "the UK stock market," they usually mean the FTSE 100. But its smaller sibling, the FTSE 250, has quietly outperformed the blue-chip index over many long-term periods. Understanding the differences between these two indices — and when each one might suit your investment goals — is essential knowledge for any UK investor.

What's the Difference?

The FTSE 100 comprises the 100 largest companies listed on the London Stock Exchange by market capitalisation. These are household names — Shell, AstraZeneca, HSBC, Unilever, BP. They're typically global businesses with revenues spread across many countries.

The FTSE 250 contains the next 250 companies by market cap — ranked 101st to 350th. These are mid-cap companies, generally smaller but still substantial businesses. Many are more domestically focused, with a larger proportion of their revenue coming from the UK economy.

Together, the FTSE 100 and FTSE 250 form the FTSE 350, which covers the vast majority of the UK's publicly traded market value. You can explore companies from both indices using the ChartsView stock pages and the screener to filter by market cap.

Key Differences at a Glance

Factor	FTSE 100	FTSE 250
Number of companies	100	250
Typical market cap	£5bn - £200bn+	£500m - £10bn
Revenue exposure	~75% international	~50% UK domestic
Average dividend yield	3.5 - 4.5%	2.5 - 3.5%
Volatility	Lower	Higher
Growth potential	Moderate	Higher
UK economic sensitivity	Lower	Higher
Sector bias	Energy, banking, mining	Real estate, industrials, consumer

Performance: Which Has Done Better?

Over many long-term periods, the FTSE 250 has delivered stronger total returns than the FTSE 100. This makes intuitive sense — mid-cap companies have more room to grow than established mega-caps. A company worth £2 billion can realistically double in size over a few years; a company worth £150 billion faces much harder maths to deliver the same percentage growth.

However, the FTSE 250's outperformance isn't consistent. In periods of economic uncertainty, recession, or UK-specific turmoil (like the Brexit vote fallout), the FTSE 250 often falls harder than the FTSE 100. Its greater exposure to the UK domestic economy makes it more sensitive to local conditions, while the FTSE 100's global revenue base provides a buffer.

The FTSE 100 also tends to outperform when the pound is weak. Since most FTSE 100 companies earn revenues in dollars, euros, and other foreign currencies, a falling pound inflates their reported earnings. The FTSE 250, earning more in sterling, doesn't benefit from this effect.

Which Index Is Better for Your Goals?

Choose FTSE 100 Stocks If You Want:

• Higher dividend income: The FTSE 100's average yield is typically 1-2 percentage points higher than the FTSE 250, making it more attractive for income investors. See our guide on building a dividend portfolio.
• Lower volatility: Large-cap stocks tend to be more stable in turbulent markets. If you're risk-averse or nearing retirement, this matters.
• Global diversification: Even though you're buying UK-listed stocks, FTSE 100 companies give you broad international economic exposure.
• Currency hedging: If you're concerned about sterling weakness, FTSE 100 companies naturally benefit from a falling pound.

Choose FTSE 250 Stocks If You Want:

• Higher growth potential: Mid-caps have historically outperformed large-caps over the long term. If you have time on your side, the FTSE 250 has been the better bet.
• UK economic exposure: If you're optimistic about the UK economy, the FTSE 250 is a more direct way to invest in that thesis.
• Undiscovered opportunities: FTSE 250 companies receive less analyst coverage, creating more potential for mispriced stocks. Use the ChartsView screener to find undervalued mid-caps that the market might be overlooking.
• Takeover potential: Mid-cap companies are more likely acquisition targets for private equity or larger rivals, which can deliver significant premium to shareholders.

The Case for Owning Both

For most UK investors, the answer isn't one or the other — it's both. A portfolio that blends FTSE 100 and FTSE 250 stocks captures the best of both worlds: the stability and income from large-caps plus the growth potential from mid-caps.

A common starting allocation might be 60% FTSE 100 and 40% FTSE 250 for a balanced approach, shifting more towards the FTSE 250 if you're younger with a longer time horizon, or more towards the FTSE 100 if you're prioritising income and stability.

Use the ChartsView comparison tool to evaluate stocks from both indices side by side. You might find a FTSE 250 industrial company that offers better growth prospects than a FTSE 100 equivalent, or a FTSE 100 defensive stock that provides the income stability your portfolio needs.

How to Research Both Indices

Whether you're looking at mega-caps or mid-caps, the research process is similar. Start with the screener to filter by market cap — over £5 billion for FTSE 100 territory, £500 million to £5 billion for FTSE 250. Add other filters like P/E ratio, dividend yield, or sector to narrow your search.

Check the stock pages for chart analysis and read the daily briefing for relevant market news. FTSE 250 companies often get less media coverage than their larger peers, so the community feed can be a valuable source of insights from other investors who may be tracking these stocks closely.

For a deeper understanding of how to use screening tools to find opportunities in both indices, see our guide on how to use a stock screener.

The Bottom Line

The FTSE 100 and FTSE 250 serve different roles in an investment portfolio. The FTSE 100 offers stability, income, and global diversification. The FTSE 250 offers growth, UK economic exposure, and the potential for undiscovered value. Neither is objectively "better" — the right choice depends on your investment goals, time horizon, and risk tolerance.

For long-term wealth building, the FTSE 250's historical outperformance is hard to ignore. For income generation and capital preservation, the FTSE 100 is the stronger option. Most investors will benefit from holding stocks from both indices, adjusting the balance as their needs evolve over time.