Where to look for income during turbulent times

Short-term volatility aside, most investors will be pretty pleased with the progress of their investments over the last 18 months or so. However, every silver lining has its cloud, and strong share price performance has seen yields tumble. Investors may now have a tougher time eking out an income from the stock market.

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Equity income funds have been a victim of their own success. Strong share price returns from some traditionally income-friendly markets have left yields looking lower. The FTSE 100, for example, has seen its yield drop from 3.6% at the start of 2025 to 2.81%. Europe and Latin America have also seen falls. Potentially, this narrows the range of options for income-seeking investors.

Income strategies offer margin of safety during tough times

This comes at a time when dividend income may be more important for investors. The conflict in Iran may have created waves in the stock market, but bond markets have been even more volatile. This has dented their credibility as a “port in the storm” option. Over the past few years, equity income funds have shown themselves to be a more reliable and consistent part of investors’ portfolios – and with stronger growth.

The underlying health of global dividends remains robust. The latest Dividend Watch report from Capital Group said global dividends reached $2.1 trillion (£1.6 million) in 2025, a 7% year-on-year increase and a new annual record. Payouts in the final quarter of 2025 hit $428 billion, ahead of expectations, with particular strength from insurance and general financials. Nevertheless, share price rises means that investors are paying more for those dividend streams and need to be more discerning.

Concentrated nature of UK stock market performance

The UK is still a fertile hunting ground. Andy Marsh, co-manager on the Artemis Income I Acc fund, observes: “The UK has been a difficult market. That changed over the last 18 months. The market has moved up 25%, and the yield has fallen 10-15%.”

While there have been some high-profile dividend cuts – notably Diageo (LSE:DGE) – Marsh says a lot of the gains have come from a handful of companies that now look expensive, including AstraZeneca (LSE:AZN), British American Tobacco (LSE:BATS), Rolls-Royce Holdings (LSE:RR.). “HSBC Holdings (LSE:HSBA) is one of the most expensive banks in the world.” Everywhere else, he says, looks reasonable and their team are finding plenty of opportunities.

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Job Curtis, manager of City of London Ord (LSE:CTY) investment trust, says valuations still don’t look stretched – certainly compared to the US, but also to Europe and Japan. He points out that the market may only be yielding 2.81%, but it also has another 2% in share buybacks. “There is still lots of value in the UK,” he says. There is also continued M&A activity. City of London has seen takeover bids for two of its holdings this year - Beazley (LSE:BEZ) and Schroders (LSE:SDR).

He says that the UK is still a compelling option to pick up high and growing dividends. Many companies re-set their payouts during Covid, which means their payout levels now look realistic and sustainable. “They’ve got on to a much better dividend footing.” He is invested in “old economy” companies such as tobacco, oil or banks and insurers, but also growth areas such as BAE Systems (LSE:BA.) and RELX (LSE:REL). The trust also has some overseas holdings, such as Swire Pacific Ltd Class B (SEHK:87)​​​​​​​.

Yields tip higher outside the FTSE 100

The jury is out on whether mid and small caps are a good source of yield. The yield on the FTSE 250 tipped higher than the FTSE 100 earlier this year, an anomaly in historic terms. Curtis points out that this is also the first time that the FTSE 100 has outperformed the mid-caps for more than five years in a row. That might suggest that mid and small caps are a fertile source of income.

However, both Marsh and Curtis say that sentiment towards smaller UK companies is still difficult and it may need a better environment than the one we’re currently in to turn that around. Curtis adds: “We do find it more difficult to pick up good-quality companies among the mid-caps. A lot of them are in the consumer discretionary sector – leisure or retail – which have borne the brunt of tax changes. Nevertheless, we have some exposure there. ITV (LSE:ITV), for example.”

Other income areas and sectors

Outside the UK, there are still plenty of opportunities, says Nick Stanhope, senior portfolio manager for Morningstar Investment Management. He likes the Schroder Asian Income Z Acc fund, which invests across Asia, with an emphasis on dividend growth. In Asia, he says, investors can benefit from a recovery in the domestic economy: “There are early signs of a recovery in the property market in China, for example, and that’s what’s needed for economic turnaround. There is a recovery story across Asia.”

He also likes emerging market debt. Government and corporate bonds in emerging markets still come with a substantial income premium to developed market bonds. A recent “Bond Boss” column, from Aberdeen, explored this topic in more detail.

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There are also specific sectors that investors can look at. Nathan Sweeney, chief investment officer for multi-asset at Marlborough, believes infrastructure could be a good choice in this environment: “It is attracting growing interest from income investors. These businesses operate essential facilities that societies rely on every day. This includes listed companies providing regulated utilities, such as gas, electricity and water; transport facilities, such as toll roads and airports; energy pipelines; and mobile phone towers.

“The stable demand for these services can translate into consistent cash flows and reliable dividends. Investors like the combination of business resilience, long-term growth potential and a steady income stream.”

Among the investment trust options are 3i Infrastructure Ord (LSE:3IN), HICL Infrastructure PLC Ord (LSE:HICL), International Public Partnerships Ord (LSE:INPP) and Pantheon Infrastructure Ord (LSE:PINT).

A more adventurous option would be Utilico Emerging Markets Ord (LSE:UEM), which invests in emerging market infrastructure.

Stanhope also likes global Real Estate Investment trusts (REITS) as a contrarian option. He says this has been a persistent weak spot, but the composition of the REITS market has changed. There are now fewer offices and retail properties, while the “other” category has significantly increased, largely as a result of new data-centre and cell-tower companies. ​​​​​​​

Investment trusts have an income edge

In a more difficult environment, the structure an investor chooses may also have a bearing on the dividends they receive. Many investment trusts have a good track record on dividend growth. Those on the Association of Investment Companies (AIC’s) “dividend heroes” list have all raised their dividends for 20 years or more.

The City of London trust is currently in its 59th year of dividend increases. The dividend heroes often have strong dividend reserves squirrelled away and ready to pay out should the income from their underlying investments temporarily dry up.

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Sweeney says investors need to be careful to balance income and growth: “Often companies paying attractive dividends tend to be ‘Steady Eddies’ in more established sectors like financial services or utilities. You’re unlikely to see the pace of earnings growth and the accompanying potential for share price gains we’ve seen in areas like technology.

“Income investors should also be wary of ‘yield-traps’. These are companies offering high yields that could superficially look very attractive. The reality though is that the company’s on a yield of, say, 7% because its share price has fallen sharply. That pushes up the value of the dividend in relation to the share price, which inflates the yield. Often the share price has plummeted for a good reason, and the unwitting investor risks being exposed to further falls and the dividend being slashed or axed completely because the troubled company can’t afford to pay it.”

There are significant risks from the crisis in the Middle East. Stanhope says: “Energy has a potential bearing on so many things, particularly if the oil price gets to a level where it goes from being just inflationary to seeing demand destruction – closer to $150 a barrel. Until this week, we’d have had the expectation that central banks would continue to cut rates. That picture is more clouded now.”

Nevertheless, this may make the argument for a dividend strategy even stronger. While stock markets struggle, a regular income means investors are paid to wait. Sweeney says: “In uncertain times, income can help soothe investors’ nerves.”