Is the FTSE 100 still an attractive place to pick up dividend shares? It’s the question many investors are asking, with yields across the index dropping as the index has surged.

With the Footsie up around 33% in just 18 months, the average dividend yield of the index has dropped to 3.1%. To give you context, that’s right at the bottom of the long-term average (3% to 4%).

But that’s not the only reason why share pickers are beginning to look elsewhere for passive income…

Bouncing bond yields

Investing in government bonds has enormous appeal if you’re seeking a regular income. They not only provide a reliable income stream and (barring some catastrophe) return your investment at maturity. Right now, the yields on these fixed-income securities are at their highest for almost 20 years.

The yield on 10-year government bonds (Gilts) is 5.4%. That’s 2.3% better than the average dividend yield for the FTSE 100. And it’s not just UK government bonds where yields are flying. The yield on US Treasuries is 5.2%, also beating the potential dividends on offer from UK blue-chip shares.

Bond yields have surged as worries over governments’ debts have climbed, and soaring energy prices have fuelled inflation. It’s not difficult to see these factors driving said yields still higher.

Talking up dividend shares

It could be easy for you and me to write off stocks as an attractive investment based on the above. However, doing so could be an enormous and expensive mistake.

One reason is that the overall return from UK shares is much closer to that provided by government bonds. Analyst Russ Mould of AJ Bell has crunched the numbers, and found that:

• FTSE 100 shares are tipped to pay £90.3bn in dividends in 2026, an all-time high.
• Footsie companies have declared total share buybacks of £46.7bn.

With these combined, Mould notes that these would take “the cash return on the FTSE 100 to £137bn, equivalent to 5.1% of the index’s £2.7trn stock market capitalisation.” That’s just below the yields on UK and US government bonds right now.

What’s more, if the FTSE index rises (admittedly, of which there’s no guarantee), the overall return could be even higher.

A FTSE 100 share I’ve bought

There’s another big reason why ignoring dividend shares could be a mistake. While government bond yields are near 20-year highs, the dividend yields on several UK blue-chip shares are still better. These include index heavyweights Aviva (LSE:AV.), Investec and Legal & General.

In fact, I recently added more Aviva shares to my own portfolio. Its 6.1% forward dividend yield beats the yield on Gilts by more than half a percentage point. And with a strong Solvency II capital ratio of 176%, it’s in good shape to pay the juicy dividends analysts are expecting.

But I’m just scratching the surface here. If Aviva’s share price also rises 6.4% over the next 12 months, as per the average analyst target, my total return will be above 12%. Just be mindful that rising inflation could compromise current price forecasts if they impact consumer spending.

Another top dividend stock

In my view, the FTSE 100 remains a great place to hunt for passive income. But I’d encourage you to consider searching across the broader UK stock market, too, for other dividend gems like the one discussed in this free wealth report.

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Royston Wild owns shares in Aviva and Legal & General.