Earlier this year, income investors holding Diageo (LSE:DGE) shares were horrified to see the dividend slashed almost in half.

New chief executive Sir Dave Lewis made the call within months of taking charge, cutting the interim payout from 40.5 cents to just 20 cents as part of a radical turnaround strategy for the drinks giant.

But with some early signs of recovery starting to emerge, could the dividend soon be on the mend? Here’s what the latest forecasts are saying.

What are the experts projecting?

For its 2026 fiscal year, Diageo’s dividend per share is expected to land at 50 cents, or roughly 37p, based on the current exchange rate. That’s a painful drop compared to the 78p paid out in 2025. But from 2027, it seems analysts expect things to begin improving with a gradual, modest recovery.

Fiscal Year

Dividend per Share

Forward Yield

2025

77.9p

4.0%

2026

37.0p

2.3%

2027

39.9p

2.5%

2028

40.0p

2.5%

Beyond 2027, dividend expectations are currently pretty flat. And that’s not too unusual given the high level of uncertainty surrounding this business right now.

But even with analysts forecasting more conservatively, could a full recovery actually be on the cards?

Why the recovery case has some credibility

Lewis set a new payout policy targeting 30%-50% of earnings, down from around 63% previously, alongside a minimum dividend floor of 50 cents annually.

That floor gives investors at least some certainty about where the payout won’t fall below. However, Diageo’s dividend cut wasn’t made on a whim. It was part of a deliberate decision to prioritise the balance sheet over the payout, and the early results suggest that trade-off might already be paying off.

Outside of North America, performance is genuinely picking up. In the third quarter of fiscal 2026, Europe delivered organic growth of 8.8%, Africa surged 17.1%, and Latin America and the Caribbean jumped 16.2%.

Cost discipline’s also helping. Management is targeting around $300m of savings by the end of fiscal 2026, with free cash flow expected to reach $3bn, up from $2.7bn the year before. That extra cash is exactly what’s needed to pay down debt and eventually create room for the dividend to grow again.

Where the risks lie

North America is still the elephant in the room, accounting for 38% of group sales. US Spirits’ organic net sales fell a sharp 15.4% in the most recent quarter, driven by soft demand and intensifying competition in the tequila category.

Management has openly admitted the business needs to become more competitive in the region, but that’s not something that changes overnight. And even if the firm executes its new strategy flawlessly, there’s still the external uncertainty surrounding tariffs, currency exchange rates, and supply chain disruptions.

So what should investors make of all this?

The bottom line

Diageo shares are clearly in the middle of a genuine but likely lengthy reset, and the dividend trajectory reflects that reality.

If management’s turnaround efforts fail, it could be forced to break its dividend floor promise. But if the strategy proves successful, then shareholder payouts could start bouncing back at an impressive pace.

Diageo’s definitely a riskier income stock right now, but with the share price trading at a significant discount, it might be a risk worth considering.

Should you invest £5,000 in Diageo Plc right now?

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Zaven Boyrazian does not hold any positions in the companies mentioned.

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