What’s in store for income investors this year?

Winners in 2025 and best bets for 2026

Companies that pay dividends must be profitable, otherwise there would not be any cash available to distribute. Because they pay dividends, they also tend to be less volatile than the broader stock market. That leads to an attractive combination of income that will tend to grow over time, as the underlying company increases its earnings, with a capital investment that will move around less than buying a non-income producing security.

Traditionally, advisors constructing portfolios for their clients would have a sizeable allocation to fixed income, either in the form of government or provincial bonds, or in investment-grade corporate securities. While the income received would not be as tax efficient as dividends or return of capital distributions from equities, the investor would be guaranteed to receive their initial capital back when the bond matured, at least in nominal terms.

Bonds were in a bear market from 1946, when the benchmark US 10-year Treasury bond was capped by the government at 2%. With the advent of high levels of inflation in the 1960s and 1970s, bonds issued with lower coupons when inflation was also lower ended up performing very effectively. That lasted until 1981, when former Federal Reserve Chair Paul Volcker's attempts to conquer inflation saw the yield on the 10-year bond briefly hit 14.5%.

A 35-year bear market was followed by a 39-year bull market as rates fell to 1.5% during the pandemic in 2020. Bonds purchased with double-digit yields delivered the same return as that expected from equities with the promise of the return of your capital, making them an almost unbeatable asset to own. In contrast, purchasing bonds with yields below 3% was a guaranteed way to lose money as central bank quantitative easing polices reignited inflation.

While the yield on the benchmark 10-year Government of Canada and US Treasury bonds rose to more than 5% after central bank rate hikes during 2022, investors who had bought bonds at generational-low rates in 2020-21 suffered losses of more than a 25%. The iShares Core Canadian Long-Term Bond ETF is down 30% over the last five years, while the broader iShares Core Canadian Bond Universe ETF is off 14.8% over the same period, before taking income into account. Given that the yield on the ETFs was below 2%, the funds posted negative total returns of -20% and -5% respectively over the last five years.

In contrast, dividend-paying equities have proven to be a much more resilient asset class. Even preferred shares, the worst-performing equity income sector, have done better. For example, the iShares S&P/TSX Preferred Shares ETF, while down 7.5% over the same period before income, has delivered a positive total return. Given that preferred yields have averaged 4%-5% even in 2020, and their duration is shorter (usually less than five years), investors have received over 10%.

Likewise, the iShares S&P/TSX Capped REIT ETF, which is off 6.5% over the five years before income, has generated a positive total return, as REIT distribution yields were in the 4%-7% range, even taking account of distribution cuts by certain subsectors such as office REITs.

Other rate-sensitive sectors such as utilities (e.g., the iShares S&P/TSX Utilities ETF) are up 13% before income, while the financials (iShares S&P/TSX Financials) have almost doubled (up 91% before income).

Unlike bonds, whose payments are fixed, equities can increase their dividends as they have pricing power to pass through cost increases. In some cases, such as regulated businesses like power companies and pipelines, there is an inflation-linked pricing mechanism built in.

While it is correct to note there are inflation-linked government bonds, nicknamed “linkers” as their payment is linked to CPI or some other measure of inflation, they have tended to trade like very long-dated bonds. Consequently, they provided little protection during the rise in inflation and interest rates in 2021-22.

Outlook for 2026

The outlook for 2026 is still unclear, but buying a combination of sectors that have lagged, such as apartment REITs and conventional energy stocks, while maintaining exposure to those that have performed well, like financials, gold, and materials, should prove effective.

The sectors that have done well in 2025 are likely to continue to deliver attractive returns next year, as the underlying factors driving their growth remain in place. This includes materials stocks, particularly metals miners that benefit from the continuing AI buildout and auto-industry electrification, such as copper, cobalt, nickel, aluminum, steel, and rare earths. Gold has been the best-performing sector as a risk hedge and store of value.

Financials have benefited from falling interest rates, a trend that seems certain to continue in the US at least. When Fed Chair Jerome Powell's term finishes next May, his likely replacement, Kevin Hassett, the current Chair of the Council of Economic Advisers, has made plain his belief in lower interest rates.

Lagging sectors also may play catch-up as those interest-rate-sensitive stocks that have not yet benefited from falling rates, such as REITs, should enjoy a recovery, especially given that many sell at large discounts to their net asset values, while conventional energy stocks are generating large amounts of cash even with the price of WTI oil below US$60 a barrel.

Income-oriented portfolios generally avoid gold stocks, primarily due to their erratic payment history. However, one mining major stands out as a consistent dividend payer, and is worth considering for those seeking gold exposure with an income element.

Franco-Nevada (TSX: FNV) is the largest and most diversified of the gold and precious metals royalty/streaming companies, with a market capitalization of $55 billion (all figures in U.S. dollars except per share numbers). Royalty and streaming companies receive a percentage royalty or production stream from gold and other precious metal mines as well as oil and gas properties but have no exposure to cost increases in production inputs. With a portfolio of different mines in various countries, the company has diversification both geographically and by type of metal. It has a portfolio of 120 producing and development assets with approximately 85% in precious metals and the remainder in iron ore and oil and gas.

Franco-Nevada has been the best-performing precious metals stock since its IPO in 2007, with its 15% annual performance beating both the S&P 500 and Nasdaq over the period, as well as gold itself. After selling off by 30% after Panama suspended operation of its Cobre Panama copper-gold mine in late 2023, the share price has effectively doubled in the last 20 months, reflecting the rise in the price of gold to record highs. Franco-Nevada's continuing strong operating performance has also contributed to the share price rise.

Franco-Nevada is the least volatile method of gaining exposure to the rise in precious metals, due to its geographic and product diversification, and it pays a low but increasing dividend, which has been maintained for 18 years. The stock has pulled back from recent all-time highs of $310, and the possible reopening of Cobre Panama gives investors a free option on a potential 25% increase in output.

Gavin Graham is a veteran financial analyst, money manager, formerly Chief Investment Officer of BMO Financial, and a specialist in international investing, with over 35 years’ experience in global investment management. He is currently Chief Investment Officer of Calgary-based Spire Wealth Management.

Notes and Disclaimer

Content copyright © 2026 by Gavin Graham. This is an edited version of an article that first appeared in The Income Investor newsletter. Used with permission.

The commentaries contained herein are provided as a general source of information, and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.

The views expressed in this post are those of the author. Equity investments are subject to risk, including risk of loss. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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