2026 Market Outlook: Energy Will Lead The Way Down

Dec. 27, 2025

Summary

• The Dallas Federal Reserve’s Q4 survey shows industry activity shrinking for a second consecutive quarter.
• Persistent contraction in the energy sector signals potential for a broader market correction if not reversed soon.
• Low energy prices are self-correcting, but sustained weakness risks a repeat of 2022’s high prices.
• Executive commentary highlights policy uncertainty and administrative disconnect as key industry concerns.
• Even if the market corrects, it could still show a gain for the year.

The Dallas Federal Reserve has collected the fourth quarter survey results and published those results here. If the results continue as they have all year, then the market is due for a correction because energy is a big part of the market. Not much can thrive if energy is not thriving. The reason is that the cure for low prices is low prices. The Dallas Federal Reserve shows industry activity shrinking for the second quarter in a row. That is something that needs to reverse if we do not want another 2022 with sky high energy prices.

The Dow Jones could drop roughly 10% from current levels to 44000 and other indexes like the S&P 500 (SP500) could post similar losses. That would mean that the S&P 500 closes around 6300 (give or take). However, timing is always uncertain as to whether they would finish the year at that level or sustain some sort of recovery by yearend.

Furthermore, the senior executive comments indicate an administration that does not understand the industry and does not want to understand the industry.

This continues an unconventional administrative strategy by the current president. The problem is when too many unconventional strategies are cobbled together, the risk of loss climbs considerably while the risk of a big win becomes infinitesimally small. That means that in plain English, this bull market is very likely to meet its end in the near future.

The way to succeed is to instead understand the established “rules” better than anyone else. Those rules can then be used in a way that no one else ever did (but the rules are not broken) to succeed in a way that no one else ever succeeded before. But that is very different from what is happening now.

It is therefore time to gradually raise some cash and take profits in anything that an investor does not want to hold during a downturn.

The Market

Currently many see low oil and gas prices as desirable. But early in the year, the Federal Reserve Of Dallas reported from its first quarter survey that oil prices in particular were below levels for many companies to drill profitability. Therefore, activity was slated to adjust downward and so were established budgets. That appears to be happening.

Furthermore, the uncertain outlook that continues in the fourth quarter survey should be reflected in conservative 2026 budgets. Now what may make this look not concerning is the climbing layoffs that have the attention of many. There could therefore be an assumption that energy prices are great and will continue to be great.

But energy has long been cyclical. No one drills to lose money. While the effects of low prices can be delayed by hedging and contractual obligations, sooner or later the market rules. Confusing a lot of voters is the delay in production declines from the start of an industry contraction. The reason for this is the decisions made by management to complete wells and begin production which often takes a few months. Production often climbs for new wells which often shows itself as increasing production even as idle rigs pile up. But if idle rigs continue to climb, then sooner or later, production will decline until the industry can profitably increase activity. That usually means a period of sky-high energy prices later.

There are more than a few industries that have similar situations. Beef prices, for example could hit new high points next year because it takes a few years for cattle herds to catch up with established demand.

The food outlook in general, is complicated by immigration issues. For as long as I have worked in the food industry, workers have crossed the border for decades and gone North to follow the work. They then circle back and follow the work South to end up back in Mexico. This whole arrangement worked great for decades until some interests noted that they could slip in some people as workers to then go elsewhere once they crossed the border. At that point, laws needed to change (probably starting about 20 years ago) and have not. So, we will likely see higher food prices next year as well because I am in farm country and the prevailing attitude is a lack of workers due to a lack of immigrants is causing a lot of food to rot in the fields.

If turns out California, where I live, has the largest Ag industry of all the states. What happens out here will have a material effect on food prices.

Just for the record, “crossing the border” does not mean making the headlines in Texas and Arizona. The industry needs a much more reliable way to cross the border. Therefore, far larger numbers of immigrants for years were brought into the country in many ways not obvious to most people and certainly not in a way to make the newspapers. The same goes for textile and some other related industries. Those headlines are likely less than 10% of the immigrant “problem” because industries need far more workers than what is in the headlines.

All of this and more points to a very rough year for the stock market. I would think that the market will decline very roughly 10%.

Now, there are some countercyclical businesses out there and gold is a possibility. But I suspect that at some point during fiscal year 2026, there will be a solid buying opportunity (because I hope things do not get worse than I expect).

Summary

I largely view the world from the energy industry. Generally, the energy industry outperforms most other industries in a downturn. But steel and other tariffs may well have changed the relationship enough for energy to lead the way down. Energy is already out of favor.

Companies like Exxon Mobil (XOM) are already on the long-term bargain table. A possible strategy with a company like this is to open a starter position and then decide later if you want to add depending upon how things go. Many of us average down in this industry all the time.

Midstream companies like Enterprise Products Partners (EPD) have a resistant business model to the business cycle. But the limited partner units will follow upstream to likewise (probably) provide a bargain buying opportunity later.

But since energy is routinely low visibility and volatile, again, many of us begin with a starter position and keep some cash in case better values happen.

There are some companies like Comstock Resources (CRK) that could well sail through the downturn because they have a new discovery that could remake company profitability. But that is far from assured. Timing of both the downturn and company progress is far from certain.

In total, it looks to me like the market overall will decline 10% at some point. Whether it ends the year that way is anyone’s guess. Because of the threat of a downturn, I would recommend industry leaders and a diversified portfolio of anything out of favor.

Because I think that tech is largely overpriced, I would avoid tech for the time being. I personally think other areas have as good or better prospects with much more reasonable pricing.

Risks

The economy could hit a home run (although I think the odds are increasingly against this outcome).

Voters could finally connect the “cure for low prices is low prices” with the higher prices that come later instead of blaming whoever is in office at the time for the high prices. That would materially smooth out cyclical cycles in the future.

Along with this should be the realization that the main inflation fighter is the Federal Reserve and not the administration. This likewise causes voter confusion.

Many prices such as food, oil and gas, are low visibility and volatile. A severe and sustained downturn could materially change the outlook of several sectors. On the other hand, some unforeseen event that causes decent prices for a few years in the future could have favorable impacts.

While I see a significant potential of a market correction, it could, if there is enough time and conditions are favorable enough, show a gain for the year on major indexes. It would not be the first time that happened.

I have bought for the Snowball 1963 shares in DIG Dunedin Income Growth Trust for 6k, after they changed their dividend policy to 6% of the year end NAV.

There is detailed research on DIG if you use the search facility

This is a decrease of income for the Snowball after the sale of GCP but hopefully if the NAV increases DIG could be paying a yield nearer to 7%.

The 2026 target remains 10k.

Future dividends will be re-invested into BRAI and DIG as this gives the Snowball some diversification into plain vanilla shares.

Third Interim Dividend

·    Third interim dividend of 4.25p per share.

·    Total dividend for the year to 31 January 2026 of at least 19.10p per share, representing an increase of 34.5% compared to the previous year.

·    Notional dividend yield of 6.0% on NAV and a share price dividend yield of 6.4%.

On 9 September 2025, the Board announced that it would significantly increase dividend distributions to shareholders and, for the year ending 31 January 2026,  the Board has already stated its intention that the Company’s dividend will be increased to a minimum of 6.0% of the NAV as at 31 July 2025, offering an attractive yield compared to cash, the FTSE All-Share Index and peers in the UK Equity Income sector. This amounts to a total dividend for the year of at least 19.10p per share, an increase of 34.5% compared to the total dividend of 14.20p for the year ended 31 January 2025. Based on the share price of 297.0p as at 10 December 2025, this represents a notional dividend yield of 6.4%.

A first interim dividend in respect of the year ending 31 January 2026, of 3.20p per share, was paid on 29 August 2025 and a second interim dividend of 4.25p per share was paid on 28 November 2025.

The Board has today declared a third interim dividend in respect of the year ending 31 January 2026, of 4.25p per share, which will be payable on 27 February 2026 to shareholders on the register on 6 February 2026 with an ex-dividend date 5 February 2026.

The remaining dividend for the financial year is expected to comprise a final dividend of at least 7.40p per share payable in May 2026. A formal dividend announcement will be made in advance of this payment. 

It is the Board’s intention to continue with a progressive dividend policy with growth in absolute terms in future years from the increased level, and for future financial years the Board anticipates three equal interim dividend payments followed by a balancing final dividend

Having carried out a year end review, after the buy in TFIF the Snowball was overweight with Loan companies. To rebalance the Snowball I have sold GCP for a profit of £345.00 and a total profit for the Snowball of 594.00

Cash for re-investment £9,447.00

Story by Money Marshmallow

Introduction

Gilts are bonds issued by the UK government. In recent years, they have become increasingly attractive to individual investors due to increasing interest rates and tax efficiency.

What are gilts ?

Gilts are a type of government bond. When you buy a gilt, you effectively lend money to the UK government in exchange for periodic interest payments (coupons) and the return of your initial investment (the principal) when the bond matures.

UK government bonds are known as ‘gilts’ because their past paper certificates had gilded (golden) edges. The name also reflects their security and reliability, as the UK Government has never failed to make repayments.

Key features of gilts:

• Issued by the UK government – Issued by the UK government, gilts are generally considered safe investments. The UK government has solid investment grade credit ratings of Aa3, AA-, and AA from Moody’s, Fitch, and S&P respectively.
• Fixed interest payments – gilts pay a fixed rate of interest that is set at the inception of the bonds. These payments are known as ‘coupons’. The interest payments are typically made every 6 months.
• Different maturities – Maturity is the time when the bond has come to the end of its life and the investor receives their money back. This ranges from a few years to several decades.
• Traded in the market – meaning their prices can go up or down.
• Return of principal at maturity – the issuer (HM Treasury) issues gilts with a promise to return your capital at maturity.

Related: Investing for Beginners: How to Start Investing in the UK

UK Gilts Explained

The pros and cons of investing in gilts

Pros:

• Low risk: Since they are issued by the UK government, gilts are considered very safe.
• Tax benefits: Capital gains from gilts are not taxed, making them attractive for investors.
• Predictable returns: You know how much you will receive at maturity, and can see a schedule of period interest (coupon) payments.
• Liquidity: Gilts can be easily bought and sold in the market.

Cons:

• Low returns: Compared to stocks or corporate bonds, gilts usually offer lower potential profits.
• Interest rate risk: Buying a gilt at a 3.75% yield may seem attractive now, however, if interest rates were to rise you would be locked into a lower rate. This causes investors to sell legacy gilts with lower rates and can lead to their prices falling.
• Inflation risk: Like all investments, inflation will eat away at the real value of returns. For example, if a gilt is yielding 4%, and inflation is 2%, the real return is 2%.

Why is now a good time to buy gilts?

This presents an opportunity for individual investors to buy them at a discount, and benefit from their tax-free capital gains when they mature.

For example, take a gilt maturing in 2026 with a low coupon of 0.125%:

• It is currently trading at a discount (<100).
• The taxable income component of its return (0.125%) is negligible.
• When it matures, the price will return to its full value (100), giving you a capital gain.
• Since this gain is considered capital rather than income, the bulk of the yield is tax-free, making it very tax-efficient.

This tax advantage makes low coupon gilts an efficient way to earn returns, especially for higher-rate taxpayers.

Comparing gilts to other investments

• Gilts vs. Corporate Bonds: Corporate bonds often offer higher yields, but they come with more risk as companies can default. Generally speaking, corporate bonds will have higher coupons, as such they are more commonly held within ISA wrappers.
• Gilts vs. Stocks: Stocks are more volatile than gilts, and provide less capital protection. However, they have higher expected returns, which minimises the risk of not receiving a required return target. Stock market index trackers can be a solid choice for investors looking to maximise long-run returns, especially if held within an ISA wrapper.
• Gilts vs. Cash Savings: Cash savings provide the greatest protection of capital (providing for the FSCS limit). Further, flex savings accounts can be accessed on demand without needing to sell a bond at the prevailing market price. However, cash savings are income products (taxed at your income tax rate), making the rates available less competitive if held outside a tax wrapper.

Who should invest in gilts?

Gilts may be suitable for you if:

• You want a safe and predictable investment.
• You are looking for tax-efficient ways to invest, especially outside of a tax wrapper such as an ISA
• You need to preserve capital.
• You prefer stability over risk.
• You are looking for a hedge against stock market volatility.

How to invest in gilts

You can buy gilts through a broker, most investment platforms will offer gilts. You can also gain exposure to gilts through pooled products such as ETFs, however, pooled products will not be subject to the same tax treatment (free of capital gains tax).

Steps to buying gilts:

1. Determine your investment objectives – Why are you investing? Will you need your money back in a year, or a few years? How much will you need to earn to meet your objective? Your investment objectives will help you narrow down a suitable range of gilts.
2. Choose a platform – Open an account with an investment platform or broker. For example, WiseAlpha allows you to start investing with just £100 per gilt.
3. Review tenors and yields – Check the current market yields for gilts with different tenors (the length of time until they are repaid). Choose a gilt that matches your investment goals.
4. Place an order – Buy directly through your chosen platform.

Conclusion

Gilts have become an attractive investment for individuals due to recent economic changes and their tax efficiency. While they may not offer the highest returns, they provide a safe and predictable way to grow your money, especially in uncertain times.

Key takeaways:

• Gilts are low-risk government bonds suitable for conservative investors.
• They offer tax benefits, making them efficient, especially for higher-rate taxpayers.
• The current market environment makes discounted gilts a unique opportunity.
• While they are safer than stocks or corporate bonds, they have lower return potential.
• Gilts are easy to buy through brokers, such as WiseAlpha.

If you are a higher or additional rate tax-payer looking for a low-risk investment that can help preserve and grow your wealth with high levels of tax efficiency, gilts might be worth considering.

Before investing, always review your financial goals and consult a professional if needed.

There are plenty of interesting opportunities available to investors in UK stocks in 2026, argue City analysts. Graeme Evans explains why and where to find them.

22nd December 2025 11:09

by Graeme Evans from interactive investor

An attractively valued FTSE 250 index has the chance to shine in 2026 as mid-cap stocks benefit from tailwinds including lower interest rates and an improved earnings outlook.

The optimism, which follows a long period when UK equities have been low down on the global shopping list, comes amid hopes that the chancellor has done enough to break the country’s so-called gilt doom loop.

The Budget’s largely disinflationary policies provided some reassurance to financial markets and appear to have opened up a pathway for more interest rate cuts by the Bank of England, fuelling hopes that long-term gilt yields will stop rising after five years.

Broker Panmure Liberum said that this should help lower discount rates for future cash flows and reduce the cost of capital: “The result should be a further re-rating of UK stocks, but growth stocks should benefit more than value stocks. Switch to stocks with faster earnings growth.”

The FTSE 250 delivered robust growth in excess of 6% in the year but remains some way short of the all-time high of 24,250 set in September 2021.

Its performance has been in contrast to the best year since 2009 for the FTSE 100 index, fuelled by strong demand for lenders, defence and commodities-focused stocks.

Panmure Liberum noted recently that the FTSE 250 is valued at about 12.4 times forward earnings, whereas the FTSE 100 is on 13.1 times and the S&P 500 index on 22.4 times after the blue-chip benchmarks set record highs during 2025.

It adds that the dividend yield in the FTSE 250 is 4.3%, which on this metric alone means the mid-cap index looks the cheapest in 23 years compared to the FTSE 100 at about 3.5%.

The UK-focused benchmark often flies under the radar for income investors, including the fact that the spread of top payers is much broader than in the top flight.

As Octopus Investments points out, the top 10 dividend payers account for more than half of the FTSE 100’s total dividend payout compared to 28% for the FTSE 250.

Rathbone UK Opportunities Fund I Acc fund expects to see small and mid-caps’ discounts close sharply in 2026, particularly as global investors may look to diversify away from US mega-cap concentration.

It adds that FTSE 250 has an abundance of high-quality businesses that investors most favour.

Fund manager Alexandra Jackson added in a recent report to clients: “UK equities are cheap compared to history and compared to their global peers. UK mid-caps are cheaper still (despite typically commanding a premium).”

She pointed out that falling borrowing costs tended to be very supportive of the performance of mid-cap stocks over larger ones.

For Sanford DeLand’s TM SDL UK Buffettology General Acc Fund, the kind of long duration quality equities in its portfolio has seen a substantial de-rating due in no small part by the rise in the UK’s long-dated gilt yield since 2021.

It told investors following the Budget: “Our firm belief is that this headwind has now run its course and going forwards it is more likely to be a tailwind for our way of investing.”

However, RBC Wealth Management has flagged the risk that an increasingly unpopular Labour government abandons fiscal discipline.

Frédérique Carrier, its head of investment strategy, said: “If the government loosens its fiscal stance to spur growth —  and its approval rating — financial markets would likely turn jittery, in our view, especially as the UK relies heavily on foreign investors to finance its debt.”

Capital Economics also warns that the risks to its interest rate and gilt yield forecasts are skewed to the upside, particularly if Keir Starmer and Rachel Reeves are ousted from their jobs.

The consultancy added: “There are question marks over whether the chancellor’s plans to hike taxes and to reduce real terms day-to-day spending growth to zero in the 2029-30 election year materialise. And party politics may force the chancellor to raise public borrowing.”

A backdrop of weak economic growth and higher-for-longer interest rates failed to stop 2025’s strong performance by UK equities, although idiosyncratic drivers at a stock level were behind much of the UK market’s return.

UBS expects returns to broaden out as the economic outlook improves, although these gains are likely to lag the pace of earnings given the strong valuation re-rating that’s already taken place.

The bank said: “While we see UK equities as well supported and expect the economy and earnings to accelerate over the next 12 months, we favour opportunities in the region with higher exposure to structural growth trends or those more cyclically exposed to a pickup in economic activity, especially in goods/manufacturing.”

Earnings have fallen around 15% over the past two years, but UBS is backing growth to improve in 2026 as US policy clarity, lower interest rates and an expected drop in energy prices begin to support end-demand.

It forecasts profits growth of 5% in 2026 and around 15% in 2027.

The bank holds a Neutral stance on UK equities, with a base case for the FTSE 100 index of 10,000 by the end of 2026. Its upside scenario highlights a year-end 10,800, dropping 7,200 under its most pessimistic forecast.

The outcome is likely to depend on continued confidence in richly-valued US equities and on commodity price trends given that this sector contributes around 25% of FTSE 100 earnings.

A reversal of recent pound strength could also support higher local currency returns, with 75-80% of FTSE 100 revenues generated outside the UK.

The bank added: “We favour structural and cyclical beneficiaries in the region. We continue to like the banking, industrials, IT, real estate and utilities sectors as beneficiaries of a combination of global secular changes, an improving cyclical outlook and supportive policy.”

Invesco believes lower interest rates should help encourage reluctant households to start spending again, adding that UK households are sitting on savings equivalent to 14% of GDP and which could be deployed as they become more confident.

It said: “We see interesting opportunities in utilities and internationally orientated consumer staples, many of which are at attractive valuations compared to their overseas counterparts.

“Healthcare remains out of favour for many, so it’s an opportunity we want to take advantage of. While already performing strongly, domestic UK banks are still well placed to deliver strong returns.”

US stock market outlook 2026: about to get even more interesting

Donald Trump faces one of the biggest tests of his presidency in 2026 and must make decisions that will have a significant impact on investors. Analyst Rodney Hobson discusses next year’s big events.

22nd December 2025

by Rodney Hobson from interactive investor

US President Donald Trump in Washington DC this month. Photo: ANDREW CABALLERO-REYNOLDS/AFP via Getty Images.

This is a very different Trump administration from the one that took power in the United States in 2017. Even 12 months in we are still learning how he will react to changes in circumstances, and indeed whether he will try to circumvent the Constitution and serve another term. It is very much a matter of conjecture and guesswork.

Eight years ago, Donald Trump had triumphed against all odds and expectations to take the crown as leader of the free world. He had nothing to prove and, despite a somewhat spiteful desire to dismantle anything that was part of the legacy of his predecessor Barack Obama, he managed to serve in a manner that was at least tolerable to his political enemies. Investors knew where they were up to.

This time round, Trump is out for vengeance. In line with his policy of never admit you are wrong, never admit you lost, he has spent 12 months lashing out in all directions. First came the tariff wars, where friend and foe suffered alike with threats of vastly raised import duties. Most of the threats unravelled when the likes of China and Canada called Trump’s bluff and bluster, but the US president persists with the myth that he is a master negotiator.

Perhaps it has been a good thing for the American economy that he then became distracted with his quest for the Nobel Peace Prize, which involved protracted negotiations with Russian President Vladimir Putin to end the war in Ukraine. Again, Trump got the worst of the negotiations, but it will be Ukraine that ultimately suffers with the loss of territory.

Another recurring theme this year has been President Trump’s attempt to bully the Federal Reserve Board into reducing interest rates. It is true that the Fed has often been criticised by politicians, economists and the media for being too slow to react to changing economic circumstances, raising and lowering interest rates after the horse has bolted, but the independence of the Fed has been a long-cherished symbol of American financial stability. It is one of the world’s most influential institutions and is considered to be a key player in the fight against inflation. It also played a lead role in seeing the US through the stock market collapse after the millennium and the financial crisis in 2007-08.

It is true that the UK managed perfectly well when interest rates were set by the Chancellor of the Exchequer but that was determined by the prevailing economic climate. What Trump has been advocating is a reduction of interest rates purely for political expediency. His campaign to force out the sitting Fed chair Jerome Powell has failed because Powell refuses to resign.

Trump has undermined Powell by publicly touting for a successor even though Powell’s term runs to next May. He is reported to be planning to appoint Kevin Hassett, director of the White House National Economic Council and a close adviser to President Trump, as the next Fed head. Hassett has enhanced his own prospects by declaring that if he were in the job, he would cut interest rates immediately, which is just what Trump has been campaigning for. Meanwhile, the Fed has started reducing interest rates but at a more measured pace.

Even if Hassett gets the nod there is no guarantee that he will please Trump once in office. After all, Powell was first appointed as Fed chair back in 2017 by none other than Donald Trump during Trump’s first stint as US president. The chances are that Hassett, if appointed, will play along before finally falling out of favour. He will not be the first best buddy to become Trump’s sworn enemy. Ask Elon Musk.

For the more immediate future, Trump may find next year that he does not have quite the grip on the American political scene that he has enjoyed since his election. Towards the end of 2025, it seemed that the first backlash against Trump could be developing. The death of the Democrats that was widely forecast 12 months ago proved to have been somewhat exaggerated as the party bounced back with several notable wins in individual states. The losing party in presidential elections, Democrat or Republican, is always immediately written off prematurely.

More ominously for the president, Republican senators and representatives are finally feeling sufficiently emboldened to defy the White House. Life could be about to get even more interesting in the US. It will begin slowly but gather momentum in a snowball effect as the midterm elections next November approach, and even more so if the Republicans lose ground and blame Trump. Any move back towards the consensus politics that characterised 20th-century America should lead to greater stability.

After all, some consensus is needed as has been shown in the repeated shutdowns of the US government apparatus as national debt limits are reached. With Trump’s policies of reduced taxation without a commensurate reduction in spending – the slash all departments policy that Musk was brought in to oversee was quickly abandoned – it is likely that debt levels will be exceeded again sooner rather than later.

The faster that interest rates are reduced, the greater the fear of inflation, which will undermine confidence in the dollar and stoke further inflation. Trump’s tariffs may help to protect American industry, but the rising cost of imported goods has pushed inflation to around 3% as opposed to the target of 2%.

However, it must be said that the American economy has come through the global economic turmoil in a healthy state, with growth in GDP bouncing back after the threat of increased tariffs sucked in imports in the first quarter. Unemployment has remained subdued.

All in all, therefore, the two stock markets based in New York will continue to provide an excellent basis for any overseas investment portfolio. Technology shares, with their inflated valuations, are for investors with an appetite for risk and also have attractions for short-term traders. Banks, housebuilders and utilities are for risk-averse investors who look to the long term.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

From BDCs to CEFs, Here’s How We’re Getting 8%+ Dividends in 2026

Michael Foster, Investment Strategist
Updated: December 25, 2025

If you’re reading this, I probably don’t have to tell you that the stock market beats most (all?) other ways of building wealth.

It’s not even close!

Over time, the S&P 500 has generated around a 10% annualized return. But of course, that line does not go straight up and to the right. There have been long periods when stocks have moved sideways, and occasional years (I’m looking at you, 2022), when they’ve taken a header.

At those times, in particular, we’re all keenly aware of the S&P 500’s lame dividend yield (around 1% as I write this). It means that those who hold, say, an index fund and need cash face the soul-crushing prospect of selling at a low (or maybe even a loss).

This is why a lot of investors (including us!) like to hold alternatives to stocks. I’m talking about assets with dividends high enough to complement our stock holdings. That way, we can lean on those payouts in a rough market without having to sell a single share.

This, in fact, is our mantra here at Contrarian Outlook. And in recent years, more investors have been looking at private investments to provide that income.

BDCs Offer Another Way to Build Your Dividend Income

One popular way to tap into private investments (private credit, to be exact) is through business development companies, or BDCs. These firms mostly lend to small- and mid-sized US firms.

The sheer diversification of America’s small- and mid-sized businesses means BDCs are naturally diversified, too. That’s a clear strength. And on the income side, we get support from the law, which says BDCs must pass 90% of their income on to investors as dividends (a structure similar to that of a real estate investment trust, or REIT). If they do, they get a pass on paying corporate income tax.

But we do have to be selective with BDCs. After all, these companies focus on smaller firms, which are naturally riskier than bigger companies. Some BDCs also come with high fees to manage their loan portfolios. And, as more BDCs enter the picture, competition for quality borrowers heats up. That can lead some BDCs to take greater risks in the loans they write (and who they lend to).

Beyond that, many BDCs have hundreds of loans, each requiring a lot of due diligence and monitoring (and more so, again, because these borrowers tend to be riskier, smaller companies).

All of these factors can drag on performance. Consider, for example, Blue Owl Capital Corporation (OBDC), which has $6 billion in assets and attracts a lot of attention with its 11.7% yield. That’s been cold comfort for investors, since OBDC has dropped 9% this year, even with dividends included. 

High Yield Didn’t Save OBDC Investors in ’25

Now don’t get me wrong. I’m not saying BDCs are to be avoided. But quality is critical here. One of the best BDCs out there is Main Street Capital Corporation (MAIN), which yields around 5% today (though it has paid closer to 7% on a trailing-12-month basis, thanks to its frequent special dividends).

MAIN (in orange below) has returned more than both OBDC (in blue) and the benchmark BDC ETF (in purple) this year.

MAIN Outruns the Competition

That’s not bad! MAIN is “returning its yield,” which is exactly what we want to see in a BDC. But when we combine, say, BDCs with closed-end funds (CEFs)—particularly equity focused CEFs—we can add more growth.

And better still, thanks to CEFs’ roughly 8% average dividends, we get a big slice of that growth “translated” into dividend income for us. So in essence, we’re getting the best of stocks and the best of BDCs here.

The best equity CEFs track, and better yet beat, the S&P 500 on a total-return basis. In fact, the equity CEFs tracked by my CEF Insider service’s Index Tracker have returned a bit more than 14% this year, just a shade off the S&P 500’s 17.5%, as of this writing:

Equity CEFs Post Another Strong Year

Source: CEF Insider

That slight underperformance is a small price to pay if you’re getting an 8% dividend (which is right around the average for all CEFs as I write this)!

And as I hinted at a second ago, some CEFs have done even better, like the Adams Diversified Equity Fund (ADX), a long-time CEF Insider holding that’s delivered a market-beating 23% total return this year, as of this writing.

This 8%-yielding fund can deliver that high payout because it translates growth (and some dividends) from its portfolio of US blue chips into cash for us. NVIDIA (NVDA), Amazon.com (AMZN), Microsoft (MSFT) and JPMorgan Chase & Co. (JPM) are among its top holdings.

Plenty of other CEFs deliver this mix of growth and income, too. Consider these numbers, which I think you’ll find pretty surprising:

• 97.7% of the CEFs tracked by CEF Insider have turned a profit over the last decade (or since their IPO for funds less than 10 years old).
• 20% of those funds have a 10% or higher return.
• CEFs trade at an average 5.3% discount to net asset value (NAV, or the value of their underlying portfolios), letting us buy in at less than market price.
• Most CEFs trade in publicly listed securities (stocks, bonds, public real estate).

These are clear strengths I see attracting more investors to CEFs in 2026, especially if we see more stock-market volatility (as I expect). In fact, it’s already happening: CEFs started the year with over 8% discounts to net asset value (NAV) on average and are now closing it with discounts at that 5.3% level I just mentioned.

A further push toward par—and the upward pressure on CEFs’ market prices it would bring—seems only a matter of time.

Vanguard Flips The Script On 60/40 Investment Strategy

The Wealth Advisor
Contributor
December 24, 2025
(Yahoo! Finance) – Vanguard is singing a new tune for investors in 2026.

It goes like this: Out with the standard portfolio mix of 60% equity and 40% fixed income. In with the opposite — a 40% equity share (20% US stocks and 20% international stocks) and 60% fixed income.

“This is a significant shift,” Roger Aliaga-Diaz, Vanguard’s global head of portfolio construction and chief economist for the Americas, told me. “It’s almost like a tectonic shift.”

Here’s what’s behind it.

Vanguard expects investors in the short term to realize returns from high-quality (both taxable and municipal) US and foreign bonds similar to the performance they would see from US equities — about 4% to 5% — but with lower risk.

Aliaga-Diaz also expects non-US equities to outperform US stocks over the next decade. Vanguard’s outlook for international stocks is 5.1% to 7.1% per year over the next 10 years, higher than US stocks.

“This is a position we suggest investors consider for the next three to five years, but it depends on risk tolerance and time horizon,” Aliaga-Diaz said.

Hedging against a tech bubble
Vanguard’s new advice is for investors with a “medium-term” outlook, and it stems from growing fears — at Vanguard and elsewhere — about an AI bubble.

The “Magnificent Seven” — Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA), and Nvidia (NVDA) — are the linchpin for the S&P 500’s growth these days. The S&P 500 index rose about 17% for the year, after a 23% gain in 2024. But analysts are increasingly concerned that they’re overvalued.

“We see that overvaluation of equity markets more as a risk to the investor than as opportunity,” Aliaga-Diaz said. “Importantly, US fixed income should also provide diversification if AI disappoints and fails to usher in higher economic growth—a scenario with odds that we calculate to be 25%–30%.”

Investing for longer-term goals
Many retirement savers, however, may be saving for longer — say, to retire in two decades or more.

How does Vanguard’s new formula apply to them?

I talked to several retirement experts about whether it’s a good idea to change course.

“Given today’s high equity valuations and higher bond yields, I certainly think it’s reasonable that a more conservative portfolio may have a better risk-return profile for the coming decade than in years’ past,” Tyson Sprick, a certified financial planner with Caliber Wealth Management in Overland Park, Kan., told me.

“Overall, I think this reinforces the value of diversification and should serve as a warning to investors having FOMO with regards to this year’s AI-driven returns,” he said.

“The end of a big year in the market is a perfect time to step back and ask, ‘What am I trying to accomplish? Do I need to reach for returns to support my desired lifestyle?’ Remember, a rate of return is not a financial goal,” Sprick added.

For retirees, the playing field can be nuanced, according to Lazetta Rainey Braxton, a financial planner and founder of The Real Wealth Coterie.

“If you’re a retiree, you may not be where you need exceptional growth and want to protect some of the recent gains by making that shift to 40/60, and it’ll be comfortable for you throughout your retirement,” she said. “It’s not about chasing returns. If you’ve done the right calculations, with a rate of return that feels good for you to solve your goals about having income now and not outliving your money, then a 40/60 could absolutely be totally fine for you.”

Lots of financial planners, however, told me “nope”— shifting to 40/60 is not what they will advise retirement savers. They universally pointed out that the 60/40 portfolio is built around balance to go the distance and achieve long-term growth in equities and stability with bonds.

It’s normal to pull back on equity holdings as retirement nears, meaning a 40/60 strategy is not out of the ordinary for this cohort. If you’re retiring within three to five years, then, generally speaking, you might want to shift to a portfolio with less risk by diversifying out of equities and more into fixed income holdings.

Target date funds are designed to do just that, and they are now the investment of choice for many retirement savers.

No rash moves
The consensus advice: Walk softly.

“I would not urge anyone to do drastic selling,” Joseph Davis, Vanguard’s global chief economist and head of Vanguard’s Investment Strategy Group, previously told me.

“This is where I say ‘stay the course,’ but start thinking about diversifying,” Davis said. “It could be smaller-cap companies in the United States, which have trailed over the past 10 or 15 years, as well as non-US investments. Every market has trailed the United States almost without exception.”

Added Aliaga-Diaz: “The bottom line is we don’t get better returns from the 40/60 — we get the same return as the 60/40, but with much less risk,” he said. “That’s really the point.”

By Kerry Hannon – Senior Columnist
December 24, 2025

The Snowball is expected to receive income in excess of £10k next year.

But for comparison purposes let’s use 10k. If you can compound your income at 7% pa you should double your income in ten years, if you cannot compound at 7%, you will still double your income but it will take longer to reach 20k of income.

The Snowball uses a comparative share VWRP and the current value is £151,533.00

Using the 4% rule to achieve a income of 20k, your fund would have to be valued in ten years time at £500k and as it is recommended to have a cash buffer of 3 years when you start to withdraw income from you fund it would need to be valued at 560k. Good luck with that. As you can see from the graph you will have many years of your fund not increasing in value but trending sideways after periods of strong gains.

The $100,000 Dividend Plan

Cash Flow Is The Only Retirement Goal That Matters

Dec. 26, 2025

Rida Morwa

Investing Group Leader

Summary

• Avoid vague wealth goals; set specific, realistic targets for retirement.
• Portfolio value fluctuates wildly; rely on stable income generation instead.
• Don’t sell shares to pay bills; replace income with dividends.
• Reinvest 25% of income to grow your cash flow and safety margin.
• Track your income CAGR to ensure that you are on pace for retirement.

Co-authored with Beyond Saving

Today, I want to have a “back to the basics” article discussing an important topic for the upcoming year. The New Year is a time for us to look back at what we did right or wrong and look forward to what we want to achieve in the future.

Setting goals is an important component in any plan, so that you know what you are trying to achieve, you can track whether you are on pace to achieve it, and you know if what you’re doing is working.

When it comes to investing, the most common goal that people are trying to achieve is to be able to fund their retirement. Also, something that many people struggle with is coming up with a goal that is both specific and realistic.

The Importance of Being Specific

“I want to have billions” – ok, that’s nice, but are you going to make billions from having $500,000 in your portfolio and working a salary job that pays you $70,000/year? Probably not. Most people who have billions made millions by doing something extraordinary in their careers. They built companies that changed the world. If that’s your goal, great; I wish you the best of luck. The Elon Musks, Jeff Bezoses, and Mark Zuckerbergs of the world made their fortunes living a lifestyle that combined an absolute obsession for their work, a spark of genius, and made a significant impact on the entire world in a way that most of us won’t. They didn’t make $100 million because they made some crazy trade in the stock market; they built multi-billion/trillion-dollar companies in which they maintained a sizable ownership stake.

For most of us, that isn’t a practical goal. Most people have chosen careers where making tens of millions, let alone hundreds of millions of dollars, isn’t possible.

If you approach the stock market imagining that you’re going to make millions/billions while starting out at $100,000, that isn’t practical. You can’t always get what you want, and the stock market isn’t a place to get rich quickly. If you set some insane goals that aren’t achievable, you aren’t likely to achieve any goal. You are going to give up because you aren’t making any meaningful progress.

We want our goal to be specific. Something that you can look at every year and tell if you are moving closer or further away. As with any large project, the sooner you identify that you are falling behind, the easier it is to catch up.

We also want our goal to be practical. Something that can reasonably be achievable and can be broken into smaller bite-sized chunks.

Why Value Is a Poor Goal

The most common mistake I see among those looking to plan their retirement is that they set goals in terms of portfolio value. In the old days, it was always $1 million. It sounds like a lot of money, and it is. Yet today, many experts suggest that you need $2 million or $3 million to ensure that you have a comfortable retirement.

All this advice has one major problem: $1 million in stocks today is not the same as $1 million in stocks yesterday or tomorrow. Someone working on retiring in the 1990s might have been thrilled to hit their $1 million goal early and retire in January 2000.

However, over the next three years, the market fell, and their $1 million became just ~$600k. This is even before we account for any money they needed to withdraw:

This isn’t an idle or theoretical risk. The stock market declines frequently, with 5-10% dips being very common. Dips of +40% are rare, but when they happen, it is usually many years before it goes back to all-time highs.

Yes, the stock market has trended upward over long periods, and it is a great generator of wealth for those who are willing to hang on through the swings. But for those who retired in 2000, thinking they had enough, seeing 40% of their retirement disappear in just three years is devastating. When you retire, you often can’t go back to a position that has comparable pay to what you were getting before you retired.

And are you comfortable taking out money when the stock market is far down? We’ve discussed in recent articles the potential risks of withdrawing too much. The response of experts in the field has been to generally suggest a very conservative withdrawal strategy. Many fall back on the work of William Bengen, who suggested that 4% withdrawals from a portfolio of 60% equity and 40% bonds, adjusting for inflation, were sustainable in any scenario.

If you are looking to be certain, then yes, the 4% rule is going to create a portfolio that will survive almost anything. As a result, it’s a very safe recommendation for those in the business to suggest because it does avoid the ultimate worst-case scenario of a retiree outliving their portfolio.

The problem with that rule is that in many cases, a retiree could withdraw a lot more and be just fine. The investor who retired at $1 million in 2003 can safely withdraw a lot more than the investor who retired at $1 million in 2000.

The challenge is to know how much you can withdraw in real time. The risk is that of living your life poorly, when you have built up a portfolio that is more than capable of supporting the lifestyle you want to live. Life is precious, and you only get to live it once. When you’re sitting there at 100 years old, you don’t want to be sitting on millions looking back at the life experiences you passed up on when you were younger and in better health—that is a risk. Maybe being completely broke is a worse scenario, but living in poverty to die wealthy is also a bad scenario.

The problem is that you can’t look at the value of your stock portfolio and know whether it is going to be safe to withdraw 7% or only 4%, because it really matters whether you are retiring in 1997, 2000, or 2003. $1 million in asset value is dramatically different for each year in terms of its ability to fund your retirement for the next 30 years.

Set an Income Goal

Stock market valuations and prices change frequently. Interest and dividends change more rarely, and in a diversified portfolio, by much smaller amounts. Whether market prices are relatively high or low isn’t particularly relevant to the income that a portfolio is generating.

You’ve spent your entire life working on a budget. You make $X in income. You made money from your job, maybe your spouse worked as well, maybe you owned a rental property, or other sources of income. You made money, and you spent less. It’s a process we are all familiar with. And that money wasn’t static. Who hasn’t lost a job, had variable hours, or worked on commissions or ran a business, having extremely variable income?

Why do we suddenly treat retirement differently? You have the same bills coming in every month. The only thing that’s changed is that you will no longer receive income from working. That income will be replaced by some combination of a pension, social security, and income derived from your retirement nest egg.

Many will sit there and tell you that you should maximize the value of your nest egg with the intent to sell it off in pieces, hoping that you don’t live too long or sell such small pieces of it that even in a crashing market, it won’t run out. If that idea fills you with dread, it’s because it isn’t natural and you have common sense. Selling assets to pay the bills is like the person who goes to the pawn shop to pay rent. It might solve the immediate problem, but that problem is going to come next month. Your bills don’t stop, and those shares you sold are gone forever.

It’s very difficult to know how big your nest egg has to be because you don’t know how the market value is going to change. It could go up or down 40% next year. That’s normal for the stock market, and normal things should be expected to happen. We shouldn’t retire and cross our fingers, hoping that normal things don’t happen.

How much income do you need to retire? Well, that’s easy. You can just look at the income you want to replace. You are still going to live on less, and you are still going to reinvest a portion of it for the future. Just because you are retired doesn’t mean life is over. You still have a future; you still need to invest in it!

We recommend planning on reinvesting at least 25% of your income. If you can reinvest more, that’s great because it will help your portfolio’s income grow faster and provide a larger cushion from disruption.

This provides you with a solid and tangible number to aim for. You know how much needs to be replaced, so you can track your path to get there.

Estimate Your CAGR

If your goal is to have $100,000/year in cash flow by the time you retire, and you are at $5,000/year now, that looks intimidating. However, if you are 40 and looking to retire by 65, you have 25 years to get there—so, you need to grow your cash flow at a pace of 12.7%/year. You can calculate this easily with a CAGR calculator. Source

You can then look to see what your trajectory should be to keep this pace:

So, your goal next year isn’t to get your cash flow “as high as possible”, it is to get it to a pace of ~$5,640/year. To the extent that you exceed that amount, you are on pace to exceed your $100k goal, allowing you to retire earlier or with more income.

If you fall behind because there are dividend cuts, investments don’t work out well, or you weren’t able to invest as much new money as you intended, you will know you are off pace immediately, and you can make relatively small changes.

You can use a calculator like this to figure out the pace you need to achieve your long-term goals. Put your current income, your target income, and how many years you want to achieve that goal within.

This will give you a tangible annual goal to target to ensure that you are on track to meet your 5, 10, or +20 year goals.

Ideas to Get You Started

So, you know how much income you need in 2026, but which picks to buy?

Virtus InfraCap U.S. Preferred Stock ETF (PFFA), which yields 9.4%, is an ETF that invests in preferred equities. PFFA is an ETF that is actively managed and uses leverage to amplify returns. As a result, PFFA management is frequently identifying opportunities that can outperform.

PFFA has materially outperformed peers that focus on following the index. We strongly encourage you to build up a portfolio of preferred equity and bonds as a base for your income portfolio. Yet that is a task that takes time. PFFA can provide quick diversification while you take the time to do your due diligence on individual picks.

Realty Income (O) is a REIT (Real Estate Investment Trust) yielding 5.8% that has trademarked “The Monthly Dividend Company”. It follows a business model of investing in triple-net leases, which make most property-level expenses the responsibility of the tenant. O has scaled up to become the largest company in its sector. O pays a dividend monthly and raises its dividend numerous times per year. It has increased its dividend every quarter since 1998. The raises often are not large, but they are frequent, and O highlights the power of compounding income.

Annaly Capital Management (NLY) is a 12.2% yielding mortgage REIT that invests in agency mortgage-backed securities, or MBS. Agency MBS is a unique asset class because the principal is guaranteed by agencies like Fannie Mae and Freddie Mac. NLY’s business strategy is to invest in agency MBS on a leveraged basis, profiting from the difference between the yield on MBS and its borrowing rate tied to SOFR. NLY’s business is very sensitive to interest rate changes but carries very little credit risk. As a result, NLY tends to outperform during periods when the stock market is crashing. In other words, it is countercyclical. Having a few countercyclical holdings can really help your portfolio during periods of economic turmoil.

We encourage investors to diversify and invest in at least 42 different holdings. This is just a list to get you started. Combined, the three have an average yield of 9.1%, which is what I target with my portfolio at High Dividend Opportunities.

Conclusion

Life is what happens when you are making other plans. So, it is very likely that you won’t achieve your annual goals every single year, and that’s ok. There are going to be challenges, and in a future article, we will discuss some typical challenges that income investors face and how to deal with them.

What’s important is that you determine what your personal goals are and chart a path to achieve them. We believe that setting a goal focused on cash flow is far more useful than one based on the big number in your portfolio. It provides something that is tangible and directly relates to your ability to withdraw cash from your portfolio. It is also less volatile. As you work towards retirement, you can’t know if you need $1 million, $3 million, or some other number, and you don’t really know if you’re making the right progress since your portfolio value will go up and down frequently.

You might decide that $100,000 in income isn’t enough, or maybe that you don’t really need that much. You are allowed to change your goals. But your pace towards achieving it will remain relatively stable. You’ll know the target you are aiming for every year, and if you get off pace or are ahead of pace, you will know it. And when you retire, you won’t be guessing how much you can withdraw any more than you were guessing how much you could spend when you were working. You have an income, spend less, and set aside a portion for the future. It’s common sense budgeting that everyone reading this knows how to do.

That’s the power of the Income Method.