If you held the City of London Investment Trust, the Schroder Income fund, or the Artemis Income fund into 2026, your year-to-date is roughly negative 2% against a FTSE 100 total return of plus 5%. None of these funds cut a dividend. None of their core holdings collapsed. What happened was a sector rotation that British income managers, trained on twenty years of the same playbook, fundamentally refused to anticipate: UK financials, traditionally a quarter of the typical income portfolio, lost 12% across Q1 2026 while UK industrials gained 14%.
What drove the rotation
Three things, layered. The Bank of England cut to 3.75% on 6 February 2026 squeezed net interest margins at NatWest, Lloyds and Barclays — none cut dividends, but the market discounted future ones. Simultaneously, the UK defence procurement bump under the new SDR allocated £18bn extra to BAE Systems and Rolls-Royce over five years, rerating both stocks. And the AI infrastructure spend by the hyperscalers — particularly Microsoft's Wales data centre — pulled in Smiths Group, IMI, and Rotork as picks-and-shovels beneficiaries.
Standard UK income funds were 23-28% in financials at the start of 2026. They are still 23-28% in financials. That is the problem.
The three FTSE 100 income shares that survived
1. BAE Systems (BA.)
Dividend yield 2.4%, dividend cover 2.1x, year-to-date capital return +18% as of 15 May 2026. The yield looks unimpressive next to a HSBC at 7.2%, but the cover ratio and the visible order book (£72bn at Q1) make this the rare UK income stock where the dividend is genuinely growing rather than being defended.
2. Diageo (DGE)
Dividend yield 3.1%, the share oversold in late 2025 on US tariff fears that materialised at half the level expected. Year-to-date +11%, with the May trading update showing margin recovery in spirits ahead of guidance.
3. Unilever (ULVR)
Dividend yield 3.4%, the corporate split announced 4 March 2026 separating Ice Cream into a Switzerland-listed entity unlocked roughly £6 per share of value, of which about £2 has so far been recognised by the market. Year-to-date +9%.
What to actually do with an income portfolio in May 2026
If you are running an active income portfolio, the first question is exposure to UK banks — if it is over 18% combined (HSBC + Lloyds + Barclays + NatWest + StanChart), trim. The second is whether you hold any of BAE, Diageo or Unilever; if none, the rotation has already done you damage and adding now is buying after a 10-18% rally, which is the textbook value-trap move.
A more disciplined response: switch from active income to a UK dividend ETF with quarterly equal-weight rebalancing — the WisdomTree UK Equity Income or the iShares UK Dividend (IUKD) — both of which mechanically reduce the bank weight as the share price drops and capture the industrial rotation without you needing to predict the next sector shift.