Schwab Strategist Unveils Top 3 Income-Generating Opportunities for Investors Through 2026 Amidst Sticky Inflation

In the current financial landscape, investors can still find robust yields within the bond market, but strategic selectivity remains paramount, according to Charles Schwab's mid-year economic outlook. Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research, highlighted that persistent inflation and a patient Federal Reserve are key factors influencing market dynamics. He noted that the possibility of a rate hike has increased following the recent June Fed meeting and a fresh inflation report, suggesting that the bond market is likely to experience continued volatility.

Martin projects the 10-year Treasury note yield to hover between 4% and 4.5%. However, he cautioned against adding duration—a measure of a bond's price sensitivity to interest rate changes—due to the risk of yields rising further. Bonds with longer maturities carry greater duration, making them more vulnerable to interest rate fluctuations. "They tend to be the most sensitive to interest rate changes, and we do see a risk that long-term interest rates stay elevated or even rise a little bit further from here," Martin explained in an interview with CNBC. He emphasized that investors shouldn't delay capitalizing on the attractive yields currently available.

For income-focused investors looking ahead to the latter half of 2026, Martin identifies three promising areas:

1. Investment-Grade Bonds

Investment-grade corporate bonds offer high-quality income, currently averaging yields around 5%. While spreads (the yield advantage over Treasurys) remain tight, Martin attributes this to strong corporate fundamentals, including healthy profits and robust balance sheets. "That low risk premium isn't necessarily scaring us away. We are focusing more on the absolute yields and the income you can earn," he stated. Diversification across various investment-grade sectors is advised, with numerous exchange-traded funds (ETFs) available for access.

2. High-Yield Bonds

Investors should consider incrementally increasing their allocation to high-yield bonds by one to two percentage points, depending on individual risk tolerance and time horizon. While inherently riskier due to potential defaults, Martin observes a qualitative improvement in the overall high-yield market, with higher-rated credits now constituting a larger portion of the Bloomberg U.S. Corporate High Yield Index. He believes the risk to the broad market is relatively low despite the ever-present default risk. For individual investors, mutual funds and ETFs like the Schwab High Yield Bond ETF (SCYB), boasting a 30-day yield of 6.88% and a 0.03% expense ratio, or the iShares Broad USD High Yield Corporate Bond ETF (USHY), with a 6.96% 30-day SEC yield and a 0.08% expense ratio, offer diversified exposure.

3. Preferred Securities

Preferred securities present another compelling opportunity, offering yields around 6% alongside potential tax advantages. These hybrid assets combine features of both stocks and bonds, trading on exchanges but also providing par values and a steady income stream. Most preferred securities pay qualified dividends, which benefit from preferential tax rates (0%, 15%, or 20% depending on taxable income). "Those after-tax yields can look even more attractive when you compare them to other fully taxable alternatives," Martin noted. Despite their long or perpetual maturities, preferreds are less correlated to long-term interest rates than one might assume, instead aligning more with credit risk and equity markets. Martin expressed comfort with this correlation, given the current favorable economic outlook. Notable ETFs in this space include the iShares Preferred and Income Securities ETF (PFF), featuring a 6.32% 30-day SEC yield and a 0.45% expense ratio, and the Invesco Preferred ETF (PGX), with a 6.33% 30-day SEC yield and a 0.50% expense ratio.