Cherry Reynard highlights the income funds analysts are favouring, including some out-of-form areas that could benefit from further interest rate cuts in 2026.

13th January 2026

by Cherry Reynard from interactive investor

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Like a sturdy coat, income strategies never quite get the appreciation they deserve until a chill sets in. For the time being, the sun is shining and artificial intelligence (AI) stocks continue to soar.

However, income funds can provide some much-needed insulation should the market weather turn. At the start of 2026, income-seekers have more choice than ever, with yields of 5%-plus available across equities, bonds and alternative funds.

Global dividends look healthy. The Capital Group Global Equity Study found that 88% of global companies either grew or maintained their dividend over the year to September 2025. Dividend growth was an average of 6.1%. This is a testament to the rude health of corporate balance sheets and optimism about the state of their businesses despite some of the brickbats thrown at them (tariffs, geopolitics) over the year.

Most investors don’t want a chunky income at the expense of long-term capital growth. Higher yields can be a source of distress, suggesting that the market thinks the income is about to be cut. Looking at the market today, it is true that some of the highest yields are to be found in unpopular sectors – the UK, smaller companies, parts of Asia, renewable energy. Investors need to find those areas with the cushion of an income, but without too much jeopardy on capital.

James Carthew, head of research at QuotedData, says there are plenty of low jeopardy options within investment trusts.

He points out that Aberdeen Equity Income Trust  AEI

has had a good year, and still yields 5.6%. It has proposed to join forces with Shires Income Ord  SHRS

also managed by Aberdeen, which will swell assets to between £289 million and £320 million depending on take-up. The fund would remain wedded to a progressive dividend policy. AEI has a 25-year track record of consecutive dividend increases.

Carthew also likes BlackRock American Income Trust Ord  BRAI

which has recently changed its approach, now using a quantitative model to help pick stocks. It has a value tilt and a yield of 5%.

Among the generous yields on offer in the Asian sector, he prefers the JPMorgan Asia Growth & Income Ord  JAGIfund to the Henderson Far East Income Ord HFEL0.41%, which yield 5% and 10.2% respectively. The latter tends to favour income over capital growth.

Some of the “quality” focused funds have struggled this year and are paying higher yields as a result. If the quality style were to come back into fashion, trusts such as Dunedin Income Growth Ord DIGmight revive, which under a new enhanced divided policy has a yield of 6.2%.

The same is true for smaller companies. These are on extraordinary yields – 5.6% for Montanaro UK Smaller Companies Ord  MTU

7.2% for Chelverton UK Dividend Trust Ord  SDV

but investors will have to trust in a revival. “They are the cheapest assets in the world,” says Carthew, “but everyone hates them.”

Rate-cut winners

Rate cuts could change the outlook for this part of the market. Income-generating assets may win more friends in the year ahead as interest rates fall. Last month, both the Bank of England and the US Federal Reserve cut interest rates. More rate cuts are forecast in 2026.   

While rate cuts are good for all income assets, they are particularly useful for smaller companies. Areas such as property and infrastructure may also be beneficiaries. Mark Brennan, portfolio manager on the Guinness Global Real Assets Fund, says: “These areas have long-term, inflation-linked cash flows, with multi-decade track records of maintaining and growing dividends.”

However, the post-Covid surge in inflation and interest rates put pressure on the capital performance for many companies, and the uptick in government bond yields made some “alternative income” strategies comparatively less attractive.

Brennan says many utilities companies remain a defensive and stable income option, with accelerating electricity demand in particular supporting both growing income and some attractive capital growth potential. “Yields of 4%-5% are supported by regulated business models, inflation-linked returns and exposure to strong tailwinds such as data centre build-outs and the energy transition.”

In the same vein, Carthew likes a number of the infrastructure investment trusts, including International Public Partnerships Ord  INPP

where the yield of 6.9% should be “really safe”. 

Specialist property

Brennan also likes specific areas of the real estate market. He says: “For real estate investors, high yields can be achieved in sectors that also deliver structural growth and exposure to high-quality tenants. Healthcare real estate, in particular primary care and senior housing, is one sector performing well in a higher-rate environment and well positioned to benefit from ageing populations and shifting healthcare needs.”

This is an area on which many multi-managers agree. Both Madhushree Agarwal, portfolio manager of the multi-manager team at Nedgroup Investments, and James like the Target Healthcare REIT Ord  THRL

Agarwal says: “It stands out as a resilient income play in a structurally supported market. Demand for modern, purpose-built care homes is underpinned by powerful demographic trends – an ageing population and chronic undersupply of quality facilities. This makes revenues highly predictable and largely uncorrelated with the broader economy. The trust benefits from ultra-long leases averaging 25+ years, with rents inflation-linked.” It currently yields 5.8%.

Bond markets

Fixed income still has much to recommend it for income-seeking investors. The asset class may have a new resonance for many investors as cash ISA allowances are cut in April 2027 and investors look for a halfway house between the security of cash and the higher return potential of stock markets. Yields are still high across the sector, although there are some concerns about the narrowing gap between the yields on government and corporate bonds.

Gavin Haynes, consultant at Fairview Investing, says: “Exposure to bonds provides a good bedrock for investors. I like PIMCO GIS Income Instl GBP H Acc, which looks to provide best ideas across $150 trillion (£111 trillion) global bond market, offering exposure to a well-diversified portfolio across global bond markets managed by a well-resourced and highly experienced team. The current yield is over 6% and income is paid monthly.”

For investors who like a little more spice, Haynes suggests the Aegon High Yield Bond GBP B Acc. “While the area has performed well – and would be hit by a sharp economic slowdown – the conditions remain supportive. Yields in the asset class remain attractive and defaults are low. The Aegon fund has built up a strong track record of generating strong risk-adjusted returns and paying an attractive income. The managers are high conviction stock pickers and are supported by a well-resourced team of credit analysts. The fund is currently focused on the high-quality end of the spectrum, which seems prudent, but still provides an attractive yield of just over 7%.”

Haynes also suggests VT RM Alternative Income F GBP Acc, which invests in a portfolio of specialist high-yielding investment companies. Its yield is 10.2%. “It focuses on three key themes, infrastructure, real estate and specialist credit. There are some interesting opportunities in this space, but you need specialist knowledge, which fund manager Pietro Nicholls certainly has, and it feels a better option to invest in a fund with an actively managed diversified portfolio as opposed to picking a couple of trusts yourself.”

The renewable energy investment trust sector is another potential area for income seekers, with an average yield of over 11%. However, it remains stubbornly weak, with an average -4.7% share price decline over one year. Brave investors could give it a try – and the sector could bounce significantly if sentiment turns – but there are plenty of other options where investors don’t need to take the risk. The average discount is -35.6%.

Ultimately, this is great moment for investors who need the warmth of a regular income. The choice is vast.