Dividend strategies 2026: Seeking income & diversification

• While Fed policy easing has often boded well for stocks, dividend strategies may be an option to increase portfolio income in a world with lower bond yields.
• Dividend stocks have provided improved after-tax yields, and can help diversify portfolios in an AI-driven market.
• Investors may consider the iShares Core Dividend Growth ETF (DGRO) and the iShares International Dividend Growth ETF (IGRO) for convenient access to dividend paying stocks in the U.S. and abroad.

Investors this year may have to look harder to find income. We expect 2026 to be characterized by above-trend growth and easing Fed policy, as outlined in our 2026 Investment Directions. While easing policy rates may help provide a strong background for risk-taking in the stock market, falling interest rates typically have meant bonds and cash offer less income going forward. With a large share of investor capital still sitting in cash (around $9.2 trillion at the end of 2025), income generation is becoming a portfolio-level challenge, not just a fixed income one.¹

More investors also face concentration risks due to how much of the U.S.’s stock market return is driven by AI-associated names. In 2025, about 60% of the S&P 500's return was driven by AI-associated stocks.² Dividend stocks may be a potential solution to seek income and remain invested while maintaining diversification benefits in today’s AI-driven market.

Dividend strategies may help increase income potential because they focus on companies that have a history of paying out dividends, which are company profits distributed to shareholders.

Companies that pay dividends tend to be mature with stable earnings that can support dividend payouts. Because their rapid growth phase is often behind them, these companies tend to tilt more as value exposures and often trade at a discount to the broader market.³ That contrasts with the largest companies in many stock indexes today: growth companies pioneering new technology like AI are often more inclined to invest profits in new projects, rather than return to it directly to shareholders. Those tech companies tend to exhibit stronger growth and, as a result of those lofty expectations for the future, often trade at higher price-to-earnings multiples.

There are two main types of dividend strategies.

1. Dividend growth: companies that have a sustained history of growing dividends.
2. High dividends: companies that are screened for financial health and have a history of paying out relatively high dividends.

Dividend growth and high dividend strategies, while tilted to value, do differ in sector composition, so it’s important for investors to consider the context of their portfolio when choosing which dividend strategy to employ. For example, high dividend tends to tilt more defensive than dividend growth.

Both dividend stock strategies typically exhibit lower earnings volatility vs. the S&P 500, which can potentially provide portfolios with resiliency in the case of an AI-led sell-off.⁴ High dividend and dividend growth stocks have lower correlations to the tech sector than the S&P 500 and a 60% stocks/40% bonds portfolio.⁵

As income opportunities evolve, it’s increasingly important to evaluate income opportunities on an after-tax basis. A key distinction for investors is the difference in taxation between qualified dividend income and interest income from a U.S. federal tax perspective.

• Qualified dividend income is generally taxed at long-term capital gains rates rather than ordinary income rates.
• By contrast,  income from cash mutual funds and many taxable fixed income instruments is typically taxed as ordinary income.

While certain bond exposures, such as U.S. Treasuries, benefit from state and local tax exemptions, the relative tax efficiency of qualified dividends may enhance after-tax income outcomes for some investors, particularly when comparing assets with similar pre-tax yields. As a result, evaluating income opportunities on an after-tax basis is increasingly important.

Investors may consider the iShares Core Dividend Growth ETF (DGRO), which offers exposure to approximately 400 U.S. stocks that have a history of consistently growing their dividends. This strategy not only looks at historical dividend growth but also targets companies that may be poised to continue growing their dividends over time, prioritizing long-term health over short-term gains.

For investors seeking international stock exposure, we believe international dividend strategies offer a way to diversify away from the U.S. equity market’s concentrated return drivers. Developed markets outside the U.S. — particularly Europe — have been structurally more value-oriented than the U.S., with a greater share of returns historically coming from financials, industrials, and other cash-flow-generative sectors rather than technology.⁶

International dividend strategies further amplify this difference by emphasizing companies with durable cash flows and established payout policies. Importantly, international dividend stocks have offered meaningfully higher dividend yields than comparable U.S. dividend strategies, whether high dividend or dividend growth.⁷ As a result, international dividends can potentially provide both higher income and geographic diversification at a time when U.S. equity returns have been driven by a narrow set of companies.

Investors may consider the iShares International Dividend Growth ETF (IGRO), which invests in dividend-paying companies from more than 30 countries worldwide and follows a similar dividend growth philosophy to DGRO.

As rates fall and income from cash and bonds decline, investors ought to consider how income fits into portfolios. Dividend strategies may offer income potential while also diversifying across styles, sectors, and geographies. We believe that in a lower-rate and AI-influenced market, dividend stocks may help investors seek income while staying diversified and invested.