As we look toward the upcoming year, optimism seems elusive for investors. Concerns about a potential global stock market crash loom large, with many fearing that the collapse of the artificial intelligence (AI) bubble could be the catalyst. These anxieties persist, casting a shadow over financial forecasts.

On the domestic front, UK businesses face their own set of challenges. Despite a Labour government’s aspirations for economic growth, its policies have inadvertently increased the financial burden on employers. This scenario exemplifies how political ideology can sometimes hinder rather than help national interests.

The question remains: Will Labour adjust its approach? The answer, many suspect, is no.

Nevertheless, the UK stock market continues to show remarkable resilience, offering a solid foundation for long-term investments, including pensions and Isa contributions. This steadfastness is underscored by last year’s performance in the markets. The FTSE 100, which tracks the largest companies on the London Stock Exchange, recorded a gain of over 21%. This outpaced the Standard & Poor’s (S&P) 500, even with its inclusion of the so-called ‘Magnificent Seven’ AI-driven giants: Amazon, Alphabet, Apple, Meta, Microsoft, Nvidia, and Tesla. Additionally, the broader FTSE All-Share Index delivered returns that exceeded those of the S&P 500. This performance is certainly worth noting as we navigate 2026.

Conversations with UK investment managers in recent days have highlighted their belief in the exceptional value offered by the UK stock market. They argue that it remains affordable compared to most other major markets, particularly the US, and also when viewed historically. Moreover, for income-focused investors, the market provides a reliable source of dividends, which remain yours even after distribution (though they may be subject to taxation if not held within an Isa or pension).

In recent days, I’ve spoken to a number of UK investment managers who believe our stock market skill represents outstanding value for money on many levels. They say it’s cheap compared to most other mainstream markets, especially the US, and also historically. In addition, it provides income-seeking investors with an attractive harvest of dividends which can’t be taken away from you once received (although they may be taxed if you don’t hold the shares in an Isa or pension).

A straightforward way to tap into this strong investment story is through a fund which simply tracks the UK market.

For example, exchange traded fund iShares Core FTSE 100 UCITS mirrors the performance of the FTSE100 Index, paying investors a quarterly dividend equivalent to an income of a tad over 3 per cent a year. Its annual ongoing charges are wafer-thin (0.07 per cent), and the shares are listed on the London Stock Exchange (its market ticker is ISF).

Yet a potentially more rewarding approach – but also a riskier one – is to home in on specific UK stocks which are both income-paying and as cheap as chips when compared to other stocks. In other words, they are chronically undervalued for all kinds of reasons.

Such stocks are popular with so-called ‘value’ fund managers who sift through them looking for potential winners: companies capable of turning round their businesses (and their share price fortunes), typically through reorganisation or new management – while simultaneously generating lots of cash, some of which can be used to pay shareholders a stream of dividends.

Of course, some stocks can take a long time to lose their undervalued tag – while others fall by the wayside because their businesses are not capable of recovery. But when they come good, they can seriously enrich your portfolio. Just look at the five-year performance numbers for value-orientated funds Temple Bar, Fidelity Special Values and JOHCM UK Equity Income (turn to Page 58 for more on them).

These three funds have respectively delivered five-year returns of 140, 98 and 97 per cent. To put these numbers into perspective, the FTSE

All-Share has delivered a return of 74 per cent over the same period.

In April 2024, we asked a panel of investment experts to identify UK-listed stocks which they believed had the potential to deliver bounce-back returns.

Even though only 20 months have passed, some of these picks have already done rather well: the likes of Costain (up 104 per cent), Lloyds Banking Group (95 per cent), Prudential (60 per cent), Tesco (58 per cent), and AJ Bell (51 per cent).

Equally, some have failed to realise their value, including everyone’s favourite baker Greggs (down 39 per cent), chemicals group Croda International (down 43 per cent) and electronics component manufacturer TT Electronics (down 26 per cent).

Of the 20 selected, 11 have share prices above their level in April 2024. Over this period, the FTSE All-Share Index has advanced by 30 per cent. Last week, we asked a panel of investment experts – fund managers, strategists, and analysts – the same question that we posed 20 months ago: which undervalued UK stocks could (not will) come good this year and beyond?

Their eight choices come from across the marketplace. The only condition imposed on them is that their picks must be paying a dividend. All share prices and dividend yields are correct at the time of writing.

1. BP (FTSE100)

IN April 2024, Ian Lance, co-manager of investment trust Temple Bar, described BP as a potential ‘new total return king’. Although he was right that the energy giant’s dividends would keep growing, BP’s share price has slid back 16 per cent.

Yet he hasn’t given up on the company. Far from it. BP remains the fourth biggest holding in Temple Bar’s portfolio. Lance believes the announcement of a new chief executive (Meg O’Neill) and the presence of US activist fund manager Elliott on the company’s shareholder register is good news for investors.

Elliott wants BP to dispose of assets, cut debt, reduce spending, and refocus on oil and gas instead of renewables. Lance says that BP’s shares, currently trading at £4.40, have ‘limited downside’. If O’Neill acts on some or all of Elliott’s demands, BP’s shares will do well, he says. If she doesn’t, Lance believes the company will be vulnerable to a takeover.

Ben Kumar, head of equity strategy at Seven Investment Management, is also confident that BP’s share price can move ahead this year.

He says: ‘Eventually, green energy might supply the world but not in the next decade or so. With data centre demand increasing power requirements exponentially, energy production is a profitable place to be.’

The company’s annual dividend yield is an attractive

5.5 per cent with the first three quarterly payments for the current financial year being ahead of last year. The market ticker (surprise, surprise) is BP.

2. CMC MARKETS (FTSE250)

FOUNDED in 1989 by Peter Cruddas (now Lord Cruddas), CMC Markets has established itself as a leading provider of investment trading services in the UK, Europe, and Australasia.

Yet it is the diversification into providing white label technological services for businesses – the likes of ANZ, Currys, and Revolut – which excites Thomas Moore, manager of investment trust Aberdeen Equity Income.

He says this will provide CMC with ‘a new source of growth on a scale that other trading platforms could only dream about’.

Its shares surged by more than 29 per cent on the day its first half results for 30 September 2025 were published last November – with the company reporting better than expected numbers and forecasting that net operating income for the full year would be ahead of market expectations.

‘Lord Cruddas is a visionary who has repeatedly confounded the sceptics,’ says Moore.

‘Although the shares are up more than 26 per cent over the past three months, they are far too cheap for a business that is now morphing into a capital-light tech business.’ CMC is a top 20 holding in Aberdeen Equity Income.

The shares trade at around £3 and the first half dividend of 5.5pence will be paid this week (last year’s equivalent divi was 3.1pence). The annual dividend yield is just below 3.9 per cent and the market ticker is CMCX.

3. DIAGEO (FTSE100)

DRINKS giant Diageo continues to dispose of assets – the latest being its stakes in Kenyan drinks business East African Breweries to Japanese rival Asahi. Yet, its shares remain in the doldrums, down over the past one, three and five years.

Richard Hunter, head of markets at investing platform Interactive Investor, admits that the company has challenges: for example, customers trading down to cheaper brands and the younger consumer market being more indifferent to alcohol.

Yet it still owns the Guinness brand, the ‘jewel’ in Diageo’s crown which continues to grow annual sales in double digit terms. Its non-alcohol version, Guinness 0.0, has also proved extremely popular.

‘Diageo remains a behemoth,’ says Hunter. ‘For some, the 37 per cent share price decline last year could well provide an attractive entry point.’

Dividends are paid twice a year and equate to an annual yield of 5 per cent. Its market ticker is DGE.

4. GB GROUP (FTSE250)

THIS company is a global leader in online identity verification and fraud prevention. As William Tamworth, co-manager of investment trust Artemis UK Future Leaders and fund Artemis UK Smaller Companies, says: ‘If you’ve opened an HSBC bank account, placed a bet with Ladbrokes or bought a Christmas present from John Lewis, you may have unknowingly used its software.’

Like Halfords (see below), GB Group thrived during Covid as everyone shopped online, driving its share price above £9. Tamworth says the shares ‘were a long way from meeting our valuation threshold at the time’ [in other words, too expensive], but are now down to £2.52.

‘GB Group is generating lots of cash which feels very attractive for a leader in a growing niche market,’ he adds. For shareholders, that should mean future dividend payments and hopefully a rising share price (up 8 per cent over the past three months, but down 24 per cent over the last year). The dividend yield is modest at 1.7 per cent and the market ticker for its shares is GBG.

5. HALFORDS (FTSE ALL-SHARE)

THIS retailer of motoring and bike products was a Covid ‘winner’ as the country collectively got on its bike. Profits soared in the year to April 2021 from £19.4million to £64.5million.

But since then, it has struggled as a result of substantial cost pressures and a reluctance among consumers to replace their bikes.

Yet according to Laura Foll, a fund manager with Janus Henderson, there are signs that Halfords has turned a corner. Its results for the first half of the 2025/26 financial year reported a 9 per cent increase in bike sales. Foll says: ‘Halfords’ ability to grow earnings will be dictated by the financial health of the UK consumer, but for the first time in quite a while, some of the headwinds appear to be easing.’ The company pays dividends twice a year – the first payment for the current financial year of 3pence a share will be made later this month. The dividend yield is attractive at 6.3 per cent and the shares trade at around £1.39. The market ticker is HFD.

6. MOONPIG (FTSE250)

THIS company dominates the UK’s online greeting cards industry with a 70 per cent market share. It floated on the London Stock Exchange in early 2021 after business boomed during lockdown with shares offered at £3.50. Although they soared initially to just below £5 (June 2021), they have drifted down ever since and are now priced at just above £2.

Artemis’s Tamworth says: ‘When Moonpig came to market, it was a good business but a bad investment. Nearly five years later, it now looks like a good investment too.’

Last month, it reported a rise in first half profits and revenues with the chief executive stating that customers are ‘engaging more deeply than ever’ – with more than half using its ‘innovative creative features to make their cards ever more personal’.

Although the shares fell in price by 4 per cent last year, Tamworth says ‘trading momentum is continuing to build and the shares now look very good value’.

A new chief executive, Catherine Faiers, with a stellar background in the digital world stemming from previous roles at Auto Trader and Addison Lee, could also pep up the share price when she joins in March.

The company paid a dividend for the last full financial year of 3pence a share – and an interim payment of 1.25pence for the current year will be made in March (last year: one pence). The annual dividend yield is a shade under 1.5 per cent and the company’s market ticker is MOON.

7. RIO TINTO (FTSE100)

MINING giant Rio Tinto is in cost cutting mode as it seeks to streamline its business and strengthen its balance sheet.

Although its shares were up 26 per cent in 2025, Jason Hollands of wealth manager Evelyn Partners believes they should continue rising. Not just because of its recently announced $10billion (£7.4billion) of proposed cost cuts and asset sales, but also due to Rio’s key role in mining the metals necessary for energy transition to succeed and Artificial Intelligence to thrive.

Hollands says: ‘The materials it mines – everything from iron ore, copper, aluminium to lithium – are in great demand as the production of electric vehicles increases and data centres are being built to facilitate the use of AI.’ For investors, the annual dividend yield is attractive at 5.2 per cent with the shares trading just above £60. The market ticker is RIO.

8. VODAFONE (FTSE100)

ALTHOUGH this mobile phone giant has enjoyed a good year – its share price is up 45 per cent – Lale Akoner, global market analyst at trading platform eToro, believes there is more to come.

She says £700 million of synergies from the Vodafone and Three merger, plus business growth in Africa and Turkey, ‘could drive earnings momentum’.

Vodafone, she adds, also has more income appeal following its decision to introduce a more progressive dividend policy.

The dividend for the financial year to the end of March is expected to grow by 2.5 per cent. Going forward, the interim payment will be set at 50 per cent of the previous full year dividend.

The current dividend yield is 3.9 per cent with the shares priced at just under £1.The market ticker is VOD.