Income investing

Income has become a bigger focus amongst both retail and institutional investors in recent years as yields have risen across many markets. But income investing is rarely as simple as choosing the highest yielding asset. Different income sources behave differently, income can change over time, and capital values can fall.

Structural economic and market shifts also mean approaches to generating resilient investment income must be different.

Today’s investment landscape is characterised by two interlinked trends:

• Divergence: different countries and regions can move in different directions on interest rates, inflation (the rise in the prices of goods and services) and monetary policy.
• Dispersion: within the same market, the gap between stronger and weaker issuers (or sectors) can widen.

When divergence and dispersion are high, being selective, well-diversified and able to adapt to tends becomes more critical.

Active management cannot eliminate risk and outcomes are not guaranteed. However, it can help to improve decision-making in a more uneven environment, especially around diversification, risk control and avoiding pitfalls.

What income is

Income from investments typically comes from:

• Bond interest (coupon payments)
• Equity dividends (and, in some cases, share buybacks as another way companies return value to shareholders)
• Multi-asset approaches that blend multiple sources of income from bonds, equities and alternative sources of income

Income can be an important component of overall returns, particularly when reinvested over time. It can also help smooth the journey in some market environments, depending on the assets held and the risks taken.

What income isn’t

Income is not:

• Guaranteed: dividends can be cut; bond issuers can default; fund distributions can vary.
• The same as low risk: higher income often means higher exposure to credit, equity, currency, liquidity or other risks.
• Independent of capital value: an approach that targets income can still experience drawdowns.

Three questions to consider before focusing on yield:

1. Where does the income come from?
   Interest, dividends, or another source?
2. What risks are you taking for that income?
   Credit, equity, interest-rate, currency, liquidity, or complexity risk?
3. What could cause the income or capital value to disappoint?
   Defaults, dividend cuts, rate shocks, market stress, currency moves, or liquidity constraints.

This simple lens helps turn “income” from a headline yield into a clearer set of trade-offs. Those trade-offs become more important when markets are moving less in sync and when differences within markets are widening.

D1: divergence (why location matters)

When markets diverge, countries and regions can move differently on rates, inflation and policy. For income, this can influence:

• yield levels and the behaviour of bond prices,
• economic conditions that affect credit and earnings, and
• currency movements for overseas assets.

Chart 1: Policy rate divergence across major markets

Source: Schroders, DataStream, GS Marquee, 23 February 2026. Forecasts are not guaranteed and may not be realised.

Different central banks may take different paths on policy rates over time. That can create both opportunities and risks for income investors. For example, a bond market that offers a higher yield may also come with higher interest-rate or currency volatility.

Why it matters for income: Divergence can make a single-market income approach more exposed than it appears, because outcomes depend heavily on one rate path, one growth backdrop and, for offshore assets, one currency outcome. A broader, global lens can help compare income opportunities across markets, while making currency and liquidity risks an explicit part of the decision.

D2: dispersion (differences within markets and across assets)

Dispersion describes how widely outcomes can vary within the same asset class.

When dispersion rises:

1. “average market” figures can be less informative,
2. selection can matter more, and
3. the gap between stronger and weaker issuers can widen.

In credit, dispersion often rises when the cost of capital increases and fundamentals matter more. Bonds with similar labels can have very different risk profiles based on:

• balance sheet strength and refinancing needs,
• business model resilience,
• sector sensitivity to economic conditions, and
• liquidity.

Chart 2: Yield dispersion within Euro high yield (range vs median)

Source: Schroders, ICE, 3 March 2026. Yield dispersion range after excluding ±5th tightest/widest yield.

Even within a single bond segment, like in the Euro high yield example above, there are bonds with meaningfully higher yields than the median. A wider yield range suggests greater differences between issuers. Higher yields, or higher income payout, can reflect higher risk, including sensitivity to economic stress and default risk.

Why it matters for income: When dispersion is high, headline yields and market averages can be misleading. A higher yield may reflect genuine value, or it may be compensation for refinancing risk, downgrade risk, weaker fundamentals or poor liquidity. In these conditions, active fund managers who harness fundamental research and are able to select income opportunities matter more because broad exposure can hide weaker issuers.

Income can be sourced in different ways. Each comes with distinct risks and can behave differently through cycles.

1. Bonds: income from interest

Bonds typically pay scheduled interest, which can provide a predictable income stream at the security level. However, bond prices can still fluctuate, sometimes sharply.

Key bond risks include:

• Interest-rate risk: when yields rise, prices of existing bonds typically fall; longer maturity bonds are usually more sensitive.
• Credit/default risk: issuers may face stress; credit spreads can widen and prices can fall.
• Liquidity risk: some bonds may be difficult to trade quickly during market stress.
• Currency (FX) risk: overseas bonds can be impacted by exchange-rate moves; hedging can reduce FX volatility but may add costs and complexity.

A practical way to interpret bond yield: ask what is driving it.

• If yield is mainly driven by interest rates, it may behave differently from yield driven mainly by credit spreads, the difference in yield between a risk-free benchmark, such as a government Treasury bond, and a corporate bond with the same maturity.
• Yield driven by currency exposure can be more volatile than many income seekers expect.

In practice, two bond funds with similar yields can behave very differently depending on whether the yield comes mainly from duration, the sensitivity of a bond’s price to changing interest rates, credit risk, currency exposure, or a combination.

2. Equity: income from dividends.

While headline dividend yield is important, looking at the sustainability of the dividend yield is just as important.

Equities can contribute to income through dividends, but dividends are not guaranteed and can be reduced. Equity prices can be volatile, and equity income approaches can be sensitive to market leadership changes.

A narrow focus on the highest dividend yields can increase exposure to:

• stressed companies with weaker fundamentals,
• sector and regional concentration, and
• cyclical earnings risk.

Equities continue to play a key role in a broad income strategy, offering diversification, potential protection against inflation and higher potential total return. However, investors should avoid chasing income at the expense of total returns.

Traditional equity income strategies focus on investing in companies with higher dividend yields. But the chart below shows the drawback to this approach. High dividend payers globally, represented by MSCI ACWI High Dividend, have underperformed the standard MSCI ACWI index over the past ten years.

This is because an exclusive focus on dividend yield typically leads to high exposure to defensive areas of the market, and regions like the UK and Europe. On the other hand, it can leave a portfolio structurally under-exposed to more growth areas like cyclicals, the US or emerging markets. This approach would clearly have been a disadvantage in recent years when markets have been so concentrated around a group of fast-growing US stocks, the “MAG 7 stocks”.

Looking beyond traditional ‘income’ orientated equities can potentially improve both income quality and total return outcome.

Chart 3: MSCI All-Country World Index (ACWI) vs MSCI ACWI High Dividend (3/5/10 yrs annualised)

Source: Schroders, MSCI, January 2026.

Dividend yield alone is not a guarantee of better results or lower risk. High dividend approaches can also carry sector and regional biases.

A more “active” equity income approach should consider:

• Dividend sustainability (cash flow coverage, balance sheet strength),
• Dividend growth potential (not just current yield),
• Avoiding dividend traps (companies where yield is high for the wrong reasons, such as a falling share price due to underlying financial distress or a deteriorating business),
• and diversifying across sectors/regions to avoid “one regime” dependence.

3. Multi-asset: blended sources of income, balancing risks

Multi-asset income approaches typically combine multiple sources of income, for example, a mix of bonds, equities and alternatives. The objective is often to diversify the drivers of return and avoid reliance on a single income engine. An active approach to combining different sources of income can help ensure a sustainable income stream while managing volatility, in line with investors’ evolving needs.

Two points are worth keeping in mind:

• Diversification can help manage concentration risk, but it does not eliminate losses;
• when dispersion across assets is wide, outcomes can differ substantially depending on exposures.

The opportunity set is wide for investors who can navigate across the range of asset classes. In fact, the difference between the best and worst performers has widened in recent years, creating more scope for active managers to take advantage of the dispersion.

Wide dispersion across asset classes

Chart 4: Cross-asset best–worst spread: the opportunity set is widening

Source: Schroders, Datastream, to 31 December 2025. Quarterly total return index levels rebased to 100 on 31 December 2019. Chart includes US equities, developed market ex-US equities, emerging market equities, Japan equities, real estate investment trusts, US aggregate bond, long Treasuries, high yield, gold and commodities.

The gap between best and worst asset classes can widen significantly. Wider dispersion increases both opportunity and the cost of being positioned poorly. Diversification helps, but cannot prevent losses.

A dynamic approach thus means:

• monitoring where risks are building,
• adjusting exposures as valuations change,
• rebalancing rather than doubling down,
• and being intentional about what risks you are paid to take.

Blending the top-down and the bottom-up across assets

Source: Schroders, February 2026. For illustrative purposes only.

Why it matters for income: When income is the objective, a single asset class rarely delivers the same experience in every market environment. A multi-asset approach can help diversify how income is generated, through interest rates, credit premia, dividends and other sources, so that the portfolio is not overly reliant on one driver. In periods of wide cross-asset dispersion, being able to draw income from different sources can help manage variability, while a dynamic approach can respond to shifting valuations and risks by rebalancing exposures rather than being locked into a static mix. This is where an Active Edge can be most relevant: global perspective to widen the opportunity set, breadth to diversify income engines, and the ability to adapt as conditions evolve.

Income outcomes can sometimes disappoint. These four are among the most common mistakes income investors make.

Pitfall 1: chasing yield without identifying the risk

A headline high yield can be compensation for high risk, such as weaker credit quality or a deteriorating business. Yield can also be temporary, for example, if it reflects stressed pricing that later deteriorates.

A better question than “what yields most?”: “How sustainable is this yield? What has to go right for this income to be realised, and what could go wrong?”

Practical takeaway: Don’t compare yields without comparing risks. Ask what could impact the ability of the company to pay the income.

Pitfall 2: hidden concentration

Concentration is not only about holding a small number of securities. It can also arise through:

• heavy exposure to a single region, as an exclusive focus on dividend yield alone typically leads to high exposure to the UK and Europe, not the US, Asia or emerging markets,
• sector concentration, common in high dividend approaches and normally concentrated in defensive sectors, or
• reliance on one return driver, for example, credit beta.

When leadership changes, concentration can show up as sharper drawdowns when markets experience volatility, or more variable income outcomes.

While the growth style has outperformed in the US, and across global markets given the dominance of the US in the MSCI World index, value has outperformed on an ex-US basis, MSCI Europe, Australasia, and East Asia (EAFE) in the chart below. This emphasises the importance of diversifying across regions and across the spectrum of value, momentum, and growth so that the income and total return goals are not reliant on any one single factor, or single geography.

Chart 5: Value vs growth (World vs EAFE ex-US)

Source: Schroders, Refinitiv Datastream, GS Marquee, 23 February 2026.

Different styles, value and growth, can lead in different regions and different periods. The broader point is that relying heavily on a single region or a single style factor can increase the risk that income and total return outcomes depend on one narrow market segment.

For income seekers, this is a reminder to look through an active lens:

• Is it heavily concentrated in one region?
• Is it biased towards one style, for example, high dividend “defensives”?
• How does it behave when the market leadership changes?

Practical takeaway: Diversify across regions, sectors and styles, not just the number of names you hold in your income portfolio.

Pitfall 3: Currency (FX) surprises

Overseas income assets introduce currency exposure unless hedged. Currency moves can:

• amplify gains or losses,
• increase volatility, and
• materially change realised outcomes over shorter horizons.

Hedging can reduce currency volatility, but it may introduce costs and impact the amount of final received income.

Practical takeaway: Treat FX as a core part of the risk/return profile of overseas income, not an afterthought.

Pitfall 4: Liquidity risk, especially when it matters most

Liquidity tends to matter least when markets are calm and most when markets are stressed. In risk-off environments, bid–ask spreads can widen and certain assets may become harder to sell quickly at a fair price.

Practical takeaway: The ability to access income should be considered alongside the ability to exit positions under stress.

How an active lens can help: An active lens helps by making the risks outlined above explicit: understanding what drives income, mapping where losses could come from, checking concentrations across regions, sectors and styles, deciding whether FX is intentional, and ensuring liquidity is considered upfront. The goal isn’t to remove risk, but to avoid avoidable risks that can undermine income outcomes.

Generating reliable income in 2026 and beyond requires an active, research-driven approach that is forward looking rather than rooted in the past. Regardless of asset class, truly global and unconstrained approaches are required to maximise opportunities for diversification and access the full income opportunity set.

Schroders’ active perspective gives investors the edge in income investing. Because we have an unconstrained view across geographies and asset classes, driven by deep research, we can potentially see and reach opportunities others may miss. And the breadth of our perspective means we can show you multiple ways of reaching your income goals.

We recognise the importance of income to investors, and at Schroders, we’re proud to have built a range of dynamic income strategies spanning the full risk spectrum, to meet different client needs and income objectives, whether that’s prioritising income stability, keeping up with inflation, or blending income with growth.