Equity income investing in AI-driven markets

Key points:

• Persistent uncertainty around the path of interest rates has increased the importance of diversifying portfolio income sources.
• AI-driven market concentration is reshaping the dividend profile of broad equity indices, introducing a tradeoff between generating equity income and accessing AI’s growth potential.
• BALI and BALQ combine active dividend sourcing with option premium income, seeking to generate consistent income while maintaining exposure to the growth opportunities driving equity markets.

Generating durable portfolio income has become more complex in recent years. Policy rates have declined roughly 1.75% since the start of the US Federal Reserve’s (Fed) easing cycle in 2024,¹ reducing the cash yields available at the peak of policy tightening. At the same time, renewed inflation concerns and monetary policy uncertainty have widened the range of possible interest rate outcomes. For investors, the path dependency of traditional income sources creates inherent tradeoffs between income generation and return potential, making it difficult to calibrate portfolios for investors’ objectives amid a less certain outlook for rates.

As a result, the importance of diversifying income sources has grown. Beyond traditional fixed income approaches, equity income strategies like BALI and BALQ can provide differentiated income through actively sourced dividends on large cap stocks and option premiums — allowing investors to enhance distribution potential without stepping away from long-term equity market growth. The potential portfolio construction benefits of this approach are reflected in BlackRock’s Multi-Asset Income Model Portfolios, where BALI is used as a core equity allocation.

The changing structure of equity income

While equities are primarily used in portfolios for capital appreciation, they can also contribute to portfolio income through dividends, which return cash to shareholders. However, in recent years the income contribution of broad US equity allocations has come under pressure.

The rise of AI has driven historic market concentration in a narrow group of companies at the center of technological transformation, many of which are prioritizing reinvestment in pursuit of growth over dividend distributions. This shift is increasingly reflected in both the composition and dividend profile of today’s market leaders.

As shown in the chart below, the 10 largest companies in the US equity market now account for roughly 40% of total market capitalization, more than double their share of the index in 2010. Yet the aggregate dividend yield of those companies has fallen from 2.84% to 0.44%. For investors, this raises the question of how to maintain exposure to AI-driven market leadership while generating sufficient portfolio income.

The current AI cycle may also prove distinct from prior technology transformations given the scale of investment required to support it. With some estimates projecting AI-related spending to exceed $5 trillion globally by 2030,² companies across sectors may direct a larger share of free cash flow toward reinvestment to remain competitive in the fast-evolving AI landscape.

This extends beyond the largest first-order AI beneficiaries, as companies further down the AI value chain, including those in sectors historically associated with higher dividend payouts, increasingly direct capital toward infrastructure buildouts, automation, and AI-enabled productivity investments.

This does not mean dividend opportunities are disappearing, particularly against a backdrop of resilient earnings growth for US equities. Rather, as companies increasingly balance shareholder distributions against rising investment needs, dividend growth may become more uneven across companies.

At the same time, investors have increasingly sought ways to supplement traditional dividend income with alternative sources of equity income, contributing to significant growth in option-based strategies. Assets in the option-based income category have increased from approximately $1.8 billion at the end of 2019 to nearly $199 billion as of May 2026.³

Together, these trends reinforce the importance of an active approach to equity income that can draw on multiple income sources as market structure and corporate cash flow priorities continue to evolve.

Equity income without abandoning growth

BALI and BALQ take an active, balanced approach to equity income, allowing BALI to function as a core equity allocation, while BALQ provides more targeted growth exposure through Nasdaq-listed companies.

Two complementary sources of equity income

BALI and BALQ seek to generate equity income through two complementary sources: actively sourced dividends and option premium income.

Dividend distributions can vary significantly across sectors and individual companies in both timing and magnitude, shaped by differences in business models and strategic priorities. Capturing these opportunities requires active stock selection that anticipates changes in payment schedules and rotates toward companies where distribution potential is improving. At the core of this approach is our systematic process, which draws on more than 1,000 investment signals, seeking to identify opportunities ahead of dividend announcements.

In 2025, BALI’s dynamic approach generated more than twice the dividend income of the S&P 500 Index. The chart below breaks these distributions down into monthly contributions, illustrating both BALI’s consistently higher level of income relative to the broad US equity market and the variation in where that income is sourced over time.

Dividends are paired with a second source of equity income through option premiums. By selling index-listed call options, BALI and BALQ seek to generate additional income in exchange for modestly reducing upside participation. To help manage this tradeoff, both strategies incorporate futures exposure designed to restore some of the market participation reduced by the options overlay.

Option premiums exist across market environments, though they tend to increase during periods of market volatility. As shown in the chart below, heightened geopolitical, macroeconomic, and policy uncertainty in recent months has contributed to elevated market volatility, increasing the role option premium income can play in supporting more durable portfolio income.

Maintaining market participation

BALI has maintained style exposures closely aligned with the US equity market, rather than relying heavily on the value and high-dividend tilts commonly associated with equity income strategies. As shown below, the strategy’s most notable distinction relative to the broad market is slightly lower exposure to higher-volatility companies, resulting in an annualized volatility of 10.4% since inception compared to 13.4% for the S&P 500 Index.⁴ This balanced approach to equity income has helped keep BALI’s beta relative to the S&P 500 Index consistently between 0.8–0.85, supporting meaningful participation in broader market returns over time.⁵

BALQ applies a similar approach to Nasdaq-listed companies, pairing equity income generation with targeted exposure to many of the technology-focused companies at the center of AI innovation. In contrast to BALI’s modestly more defensive profile, BALQ seeks to maintain volatility more closely aligned with the Nasdaq 100 Index.

Diversifying income in multi-asset portfolios

As investors seek to balance income generation and growth, drawing from a broader range of income sources has become increasingly important. BlackRock’s Multi-Asset Income Model Portfolios illustrate this approach in practice, using BALI as a core equity allocation within a broader multi-asset income framework.

One benefit of this approach has been a more resilient income profile across changing interest rate environments. Since the start of the Fed's easing cycle in 2024, yield within the MAI Moderate model has increased, demonstrating how integrating strategies like BALI can help reduce dependence on the path of interest rates while enhancing portfolio income through active dividend sourcing and option premiums.⁶

This diversified approach also supports more balanced sector exposure within the models, as shown in the comparison below to a high-dividend benchmark. A larger allocation to the technology sector, for example, reflects the models' ability to generate income while maintaining exposure to the sectors and companies driving equity growth.

Despite these potential benefits, derivative income approaches, including strategies that use covered calls like BALI and BALQ, remain relatively underutilized within the income model landscape. Across the industry, only approximately 23% of moderate allocation income models include a derivative income fund,⁷ making this a notable point of differentiation within the MAI Models.

As the relationship between growth and income across equities continues to evolve alongside AI-driven market concentration, strategies like BALI and BALQ may play an increasingly important role in helping investors generate differentiated income while maintaining exposure to the long-term themes shaping equity markets.

Factor Definitions – BlackRock Fundamental Risk Equity Model

• Price-to-Book metric (Value factor measure): A positive exposure indicates a cheaper portfolio (positive exposure to the value factor).
• Earnings Yield metric (Value factor measure): A positive exposure indicates a cheaper portfolio (positive exposure to the value factor).
• Dividend Yield metric (Value factor measure): A positive exposure indicates a cheaper portfolio (positive exposure to the value factor).
• Return on Equity (ROE) metric (Quality factor measure): A positive exposure indicates a higher-quality portfolio (positive exposure to the quality factor).
• Leverage metric (Quality factor measure): A positive exposure indicates a higher-leverage portfolio (negative exposure to the quality factor).
• 12-Month Momentum metric (Momentum factor measure): A positive exposure indicates greater exposure to stocks that have outperformed the market over the past year (positive exposure to the momentum factor).
• 1-Month Reversal metric (Momentum factor measure): A positive exposure indicates greater exposure to stocks that have outperformed the market over the past month (negative exposure to the momentum factor).
• Volatility metric (Low Volatility factor measure): A positive exposure indicates a higher-volatility portfolio (negative exposure to the low-volatility factor).
• Size / Market Capitalization metric (Size factor measure): A positive exposure indicates greater exposure to large-capitalization stocks (negative exposure to the low-size factor).
• Growth metric (Growth factor measure): A positive exposure indicates a higher-growth portfolio (positive exposure to the growth factor).