Charles Schwab Outlines Top Three Income Strategies for the Remainder of 2026

While the bond market continues to offer attractive yields, Charles Schwab’s mid-year outlook emphasizes that selectivity is paramount. Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research, suggests that persistent inflation and a patient Federal Reserve may lead to continued volatility. Following recent inflation data, Martin notes that the possibility of further rate hikes has increased, meaning the 10-year Treasury note yield will likely fluctuate between 4% and 4.5%.

Due to the risk of rising yields, Martin advises against adding duration—the measure of a bond’s price sensitivity to interest rate changes. Bonds with longer maturities are most susceptible to these fluctuations, and Martin warns that long-term rates may remain elevated. However, he believes investors should still capitalize on current yield opportunities. For the second half of 2026, he identifies three primary areas for income growth:

Investment-Grade Bonds
Investment-grade corporate bonds currently offer high-quality income with average yields around 5%. While the yield advantage over Treasurys (the spread) is narrow, Martin argues this is a result of strong corporate fundamentals. Robust profits and healthy balance sheets make these absolute yields attractive, regardless of the low risk premium. He recommends broad diversification across investment-grade sectors, often best achieved through exchange-traded funds (ETFs).

Increased High-Yield Exposure
Martin suggests that investors consider increasing their high-yield bond allocation by one to two percentage points, depending on their individual risk tolerance. While these assets carry a higher risk of default compared to investment-grade bonds, the overall quality of the high-yield market has improved. A larger portion of the Bloomberg U.S. Corporate High Yield Index now consists of higher-rated credits, lowering the systemic risk to the broad market.

Since building a diversified high-yield portfolio is challenging for individual investors, Martin recommends mutual funds and ETFs. Examples include the Schwab High Yield Bond ETF (SCYB), featuring a 30-day yield of 6.88% and a 0.03% expense ratio, and the iShares Broad USD High Yield Corporate Bond ETF (USHY), which offers a 6.96% 30-day SEC yield and a 0.08% expense ratio.

Preferred Securities
Preferred securities offer yields around 6% and provide significant tax advantages. These hybrid assets combine features of both stocks and bonds: they trade on exchanges like equities but pay a fixed stream of income like bonds. Martin points out that most preferred securities pay qualified dividends, which are taxed at lower rates (0%, 15%, or 20%) based on the investor’s income level, making their after-tax returns more competitive.

Although preferred securities often have long or no maturity dates, Martin notes they are less correlated with long-term interest rates than traditional bonds. Instead, they track credit risk and equity market performance more closely. Given the relatively favorable economic outlook, he views this as a comfortable entry point. Notable options in this space include the iShares Preferred and Income Securities ETF (PFF), with 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.

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