Income Isn’t “Safe” Anymore

For many charity finance directors, income has long occupied a special place in investment discussions. Income feels tangible. Interest payments arrive in cash. Dividends land in the account. Spending can be funded without the perception of "using capital". For years, this made income-focused investing seem like the natural solution for charities seeking financial stability.

The challenge today is that the environment has changed.

After one of the most significant interest rate cycles in decades, assumptions about income, yield and reliability deserve renewed scrutiny. Sustainable income is no longer simply about finding the highest yield available. Increasingly, it is about understanding the risks that sit behind that yield.

When income felt straightforward

For much of the period following the global financial crisis, interest rates remained exceptionally low. Investors searching for income often had little choice but to move further along the risk spectrum, relying on dividend-paying equities, higher-yielding bonds or specialist income strategies.

Then rates rose sharply.

Suddenly, cash deposits and government bonds began offering yields that looked attractive again. For charities accustomed to years of near-zero rates, it felt like income had returned.

However, higher yields did not arrive without consequences. The same rate increases that boosted future income also caused significant repricing across bond markets. Assets traditionally viewed as dependable sources of income experienced meaningful capital volatility. The lesson was clear: a higher yield often means accepting a higher-risk investment.

Yield and risk are inseparable

One of the most common mistakes investors make is treating yield as though it exists independently of risk.

In reality, yield is often telling you something about the uncertainty surrounding an investment. If one asset offers significantly more income than another, there is usually a reason.

Bond markets provide a useful example. When interest rates rise, newly issued bonds offer higher yields. Existing bonds, which pay lower rates, become less attractive and their prices fall. An investor may enjoy a higher income stream going forward, but the value of the underlying asset can fluctuate far more than expected.

The same principle applies elsewhere. Higher-yielding investments often expose portfolios to greater sensitivity to economic conditions, credit risk or market sentiment.

For trustees and finance directors, focusing solely on the income received can obscure the overall investment picture.

Dividends are not guaranteed

Equity income presents a similar challenge.

Many charities view dividend-paying companies as reliable sources of spending support. While dividends can be a valuable component of long-term returns, they are ultimately discretionary.

Companies can reduce, suspend or cancel dividend payments when profits come under pressure. Even well-established businesses are not immune. During periods of economic stress, boards naturally prioritise balance sheet strength and operational resilience before shareholder distributions.

There is also a concentration risk that often receives less attention. Equity income indices and income-focused strategies can become heavily reliant on a relatively small group of sectors or companies responsible for a disproportionately large share of dividends.

A portfolio that looks diversified by number of holdings may be less diversified from an income perspective than trustees realise.

The danger of chasing income

Periods of uncertainty often encourage investors to pursue the highest available yield.

The problem is that yield chasing can introduce risks that are not immediately obvious.

Higher-yielding assets may appear attractive when viewed through the lens of current spending requirements, but they can expose a charity to larger capital losses, greater volatility or weaker long-term growth prospects.

In some cases, investors end up sacrificing resilience in pursuit of income that proves unsustainable.

The key question posed is often "How much income does this generate today?" Instead, finance directors should ask: "How sustainable is this income through different market conditions?"

A shift towards total return thinking

This is where a total return approach becomes increasingly relevant.

Rather than dividing investments into artificial categories of "income" and "capital", total return focuses on the overall outcome generated by a portfolio. Income remains important, but it is considered alongside capital growth rather than in isolation.This approach can provide greater flexibility.

If a portfolio generates part of its return through dividends and interest and part through capital appreciation, spending decisions become less dependent on the behaviour of any single income source. It can also support broader diversification, allowing portfolios to invest in areas that may have lower yields today but stronger long-term return potential.

For charities with multi-year objectives, this broader perspective often aligns more closely with long-term financial sustainability.

Setting realistic expectations

Perhaps the most important adjustment for trustees is one of expectations.The post-rate-cycle world offers opportunities, but it also reminds us that income is not a risk-free asset class. Bond yields can move. Dividends can change. Markets can reprice quickly.

Sustainable income is therefore less about maximising yield and more about building a portfolio capable of supporting spending requirements through a range of economic environments.