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Recent literature shows that income diversification is an important strategy for rural households to manage drought risk in arid and semiarid regions. This article examines whether income diversification can help rural households to overcome the adverse impact of drought in Northern China. Based on field interview data from 291 rural households in 13 townships of Northern China, we found that rural households tend to have a more diversified portfolio of income; the spatial location of rural households determines the type and number of income sources, the degree of income diversification, and the income combinations, especially under the context of frequent drought strikes. These results indicate that income diversification could help rural households to reduce the adverse impact of drought, enhance their resistance and resilience to drought, and make their livelihood system more stable. Income diversification not only is a useful strategy in terms of managing disaster risk and improving social welfare, but also may offer a new perspective for the research of vulnerability, resilience, and adaptive ability of rural social-ecosystem.