Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Seeking income in a rising rate world

Stephen Dover, CFA, Chief Market Strategist, Franklin Templeton Institute

The search for income has become more complicated as inflation soars to four-decade highs while the global economy wrestles with the continued supply and demand imbalances from the pandemic and war in Ukraine. Meanwhile, broad monetary policy tightening is raising concerns about slowing economic growth.

Income is an effective tool to lower the volatility of an investment in this uncertain environment by providing steady cash flow as principal value is fluctuating. Income opportunities exist for investors willing to broaden the potential sources of yield.

  • Dividend-paying stocks remain an important source of income. Given the uncertain economic backdrop, investors should remain selective and lean on quality dividend plays including stocks of companies with robust free cash flows and long track records of growing dividends. Companies that pass though inflated costs, like listed infrastructure and real estate, can be useful sources of income and potential inflation hedges.
  • If inflation remains elevated and central banks respond with higher-than-expected rate increases, investors should consider using short-duration instruments to mitigate interest rate risks. High-yield bonds and floating rate notes are good candidates in this environment given their higher nominal yields, low duration and relatively lower volatility. These instruments have better quality and stronger fundamentals than in the past, and unless economic growth falls dramatically, there is likely to be a low rate of defaults.
  • If inflation and rate increases do not rise above current market expectations, there is a case for longer-duration instruments. While bonds have been both more volatile than equities and more correlated to equities in the first part of 2022, this is not the case historically. If inflation slows and the economy does not fall into recession, the diversification effect (ballast) of longer-duration government bonds could return.
  • Private commercial real estate exhibits lower volatility relative to stocks, higher yields relative to traditional fixed income assets, and low correlation to returns from equities and bonds. Given that real estate leases tend to have contractual rent increases that are linked directly to annual inflation rates, the asset class has historically acted as a robust hedge against inflation.
  • Active management will be more critical going forward. Higher volatility can provide opportunity to reset allocations. Achieving a diversified portfolio will likely include a more creative re-allocation of traditional assets and a wider array of alternative assets. Re-allocating toward your long-term targets can help maintain balance in portfolios.

Download the full report


 

Leave a Comment:

banner

Most viewed in recent weeks

Finding the best income-yielding assets

With fixed term deposit rates declining and bank hybrids being phased out, what are the best options for investors seeking income? This goes through the choices, and the opportunities and risks involved.

What history reveals about market corrections and crashes

The S&P 500's recent correction raises concerns about a bear market. History shows corrections are driven by high rates, unemployment, or global shocks, and that there's reason for optimism for nervous investors today. 

Howard Marks: the investing game has changed

The famed investor says the rapid switch from globalisation to trade wars is the biggest upheaval in the investing environment since World War Two. And a new world requires a different investment approach.

Welcome to Firstlinks Edition 605 with weekend update

Trump's tariffs and China's retaliatory strike have sent the Nasdaq into a bear market with the S&P 500 not far behind. What are the implications for the economy and markets, and what should investors do now? 

  • 3 April 2025

Designing a life, with money to spare

Are you living your life by default or by design? It strikes me that many people are doing the former and living according to others’ expectations of them, leading to poor choices including with their finances.

World's largest asset manager wants to revolutionise your portfolio

Larry Fink is one of the smartest people in the finance industry. In his latest shareholder letter, the Blackrock CEO outlines his quest to become the biggest player in private assets and upend investor portfolios.

Latest Updates

Investment strategies

An enlightened dividend path

While many chase high yields, true investment power lies in companies that steadily grow dividends. This strategy, rooted in patience and discipline, quietly compounds wealth and anchors investors through market turbulence.

Investment strategies

Don't let Trump derail your wealth creation plans

If you want to build wealth over the long-term, trying to guess the stock market's next move is generally a bad idea. In a month where this might be more tempting than ever, here is what you should focus on instead.

Economics

Pros and cons of Labor's home batteries scheme

Labor has announced a $2.3 billion Cheaper Home Batteries Program, aimed at slashing the cost of home batteries. The goal is to turbocharge battery uptake, though practical difficulties may prevent that happening.

Investment strategies

Will China's EV boom end in tears?

China's EV dominance is reshaping global auto markets - but with soaring tariffs, overcapacity, and rising scrutiny, the industry’s meteoric rise may face a turbulent road ahead. Can China maintain its lead - or will it stall?

Investment strategies

REITs: a haven in a Trumpian world?

Equity markets have been lashed by Trump's tariff policies, yet REITs have outperformed. Not only are they largely unaffected by tariffs, but they offer a unique combination of growth, sound fundamentals, and value.

Shares

Why Europe is back on the global investor map

European equities are surging ahead of the U.S this year, driven by strong earnings, undervaluation, and fiscal stimulus. With quality founder-led firms and a strengthening Euro, Europe may be the next global investment hotspot.

Chalmers' disingenuous budget claims

The Treasurer often touts a $207 billion improvement in Australia's financial position. A deeper look at the numbers reveals something less impressive, caused far more by commodity price surprises than policy.

Fixed interest

Duration: Friend or foe in a defensive allocation?

Duration is back. After years in the doghouse, shifting markets and higher yields are restoring its role as a reliable diversifier and income source - offering defensive strength in today’s uncertain environment.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.