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If you’re one of the investors who took the chance Rolls-Royce (LSE:RR) is shared when traded at about 60p. This year, we will receive approximately 13% of the original investment as dividends. It’s an incredible bonus to complement the 1,100% stock price growth ever since.
Reintroducing dividends
After five years of off, Rolls-Royce is reviving its dividend. This marks a significant milestone in that turnaround. The company announced a 6p payment per share when distributed in June 2025. The decision follows the stellar performance in 2024, with operating profits from 55% to £2.5 billion and free cash flow of nearly £2.4 billion.
Additionally, Rolls-Royce launched a £1 billion share buyback program, returning a total of £1.5 billion to shareholders. CEO Tufan Erginbilgic highlighted the company’s transformation into a high-performance, resilient business driven by strong results across all core divisions.
Looking forward to it, Rolls-Royce’s dividend outlook is promising, with analysts predicting steady growth. Payments are expected to increase from 6p in 2025 to 7.8p in 2026 and 9.01p in 2027, reflecting an annual increase of 30% and 16%, respectively. The company aims to distribute 30%-40% of its underlying pre-tax profit as dividends, supported by robust revenue growth.
Pre-tax profit is projected to reach £2.86 billion in 2025 and £3.188 billion by 2027. However, dividend yields remain modest at less than 1% at current prices, reflecting the recent gatherings of the stock. Nevertheless, the improvements in Rolls-Royce’s cash flow and profitability support its long-term dividend potential.
Riding volatility
President Trump’s tariffs could create considerable challenges for Rolls-Royce. As a major exporter of aircraft engines and power systems, the company relies heavily on global supply chains and international trade.
Tariffs, including collections on UK exports to the US, have increased production costs and disrupt operations. In theory, tariffs would reduce UK companies’ competitiveness in the US market.
However, it is important to note that while 31% of the company’s sales are in the US, 30% of its manufacturing capacity is also in the state. This should reduce some of the impact.
Conclusion
I’ll start by saying I wouldn’t buy Rolls-Royce stock today for dividends in the near future. However, this is a booming business, highlighting that over time the gradual increase in dividends could actually increase. Take a look at Warren Buffett’s example coca cola – He currently receives a yield of around 60% based on the value of his initial investment. That’s something to think about.
More generally, Rolls-Royce benefits from strong demand for long-distance travel and defense contracts, with an operating profit margin of 13%-15% by 2027. The focus on Rolls-Royce’s cash flow generation and cost-reducing positions is also more resilient.
However, the risk is rising. Trump’s tariffs could threaten supply chain stability, inflate production costs and undermine the demand for air travel. Now I’m just watching volatility from afar. Even this somewhat attractive 25x revenue, I don’t expect to add to my holdings anytime soon.
