What the next phase of the dividend cycle means for Australian investors

There’s one thing we can say with confidence about the outlook for equity income in 2026 - that is that dividends and franking credits will remain a critical component in most Australian portfolios.

Some income investors may feel a little flat with ASX 200 dividends down 3.6% so far in 2025 compared with 2024. But with active, tax-aware management of a diversified equity portfolio, investors could still have captured a disproportionately larger share of the roughly $90 billion in dividends paid this year and the $30 billion in franking credits.

For Australian retirees and low-tax investors, franking continues to be the icing on the cake.

Dividends stabilise as 2026 approaches

Encouragingly, Plato Investment Management’s proprietary dividend-cut model has strengthened in the latter part of 2025. It now indicates that the probability of dividend cuts is below average.

Figure 1: Dividends Plato

As a result, we expect a modest uplift in overall dividend payouts across Australian equities in 2026. At the index level, we project the ASX 200 will deliver a gross yield of around 4.4% (including franking credits).

But, as always, active management and tax-aware portfolio construction should be able to generate meaningfully higher income than the index alone.

Where to look for income in 2026  

Energy is where we see the greatest risk of dividend cuts, largely driven by a weakening oil price over the past 12 months.

In contrast, industrials, including select mining services companies, offer attractive opportunities. High gold prices have supported increased investment across the sector, which should help underpin improving dividends. We also remain constructive on consumer discretionary, where spending has proven more resilient following interest-rate cuts.

When it comes to the banks, for now, Westpac (ASX: WBC) stands out as our pick of the Big Four - for both capital growth and dividends in 2026. Dividend yields across the other major banks remain healthy, with gross yields of 5.7%–5.9%, comfortably above market levels.

However, here’s a left-field prediction: 2026 may be the year global banks outshine their Australian counterparts when taking dividends and capital growth into account. We advocate for a blend of Australian and Global equity income strategies in portfolios.

As CBA’s recent share-price wobble showed, relying heavily on the traditional big-name ASX dividend stocks (such as the big banks and Telstra) for income carries significant risk - especially when valuations become stretched.

Why some yields are a warning, not an opportunity  

The biggest swing factor is a significant decline in commodity prices, which would pressure the major miners and their historically strong payouts. Geopolitical conflict will also continue to be a heightened risk factor in 2026, but trying to predict such shocks is futile.

We prefer to ensure our portfolios are diversified and better protected from outsized impacts in the event of shocks.

Beware too of classic dividend traps - if a stock’s historical yield looks unusually generous, it almost certainly reflects a company with impaired growth prospects.

Don’t put all your yield in one basket

In equity income, diversification is the only free lunch. Investors should ensure their portfolios, or the funds they choose to invest in, are genuinely active and properly diversified. The Australian index, and many naïve index-like yield strategies, carry substantial concentration risks, particularly overweight positions in the big banks, Telstra, and potential dividend traps.

In 2026 and beyond, generating meaningful dividends and franking credits from outside the usual household-name income stocks will be essential.

Please note, this wire is part of Livewire's Ultimate Investing Guide for 2026. The full guide is available for download here.