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

  •   29 June 2022
  •      
  •   

 

Leave a Comment:

banner

Most viewed in recent weeks

Building a lazy ETF portfolio in 2026

What are the best ways to build a simple portfolio from scratch? I’ve addressed this issue before but think it’s worth revisiting given markets and the world have since changed, throwing up new challenges and things to consider.

Meg on SMSFs: First glimpse of revised Division 296 tax

Treasury has released draft legislation for a new version of the controversial $3 million super tax. It's a significant improvement on the original proposal but there are some stings in the tail.

Ray Dalio on 2025’s real story, Trump, and what’s next

The renowned investor says 2025’s real story wasn’t AI or US stocks but the shift away from American assets and a collapse in the value of money. And he outlines how to best position portfolios for what’s ahead.

13 million spare bedrooms: Rethinking Australia’s housing shortfall

We don’t have a housing shortage; we have housing misallocation. This explores why so many bedrooms go unused, what’s been tried before, and five things to unlock housing capacity – no new building required.

10 fearless forecasts for 2026

The predictions include dividends will outstrip growth as a source of Australian equity returns, US market performance will be underwhelming, while US government bonds will beat gold.

10 things I learned about dementia and care homes from close range

My mother developed dementia before eventually dying in June last year. She was in three aged care homes before finding the right one. Here is what I learned along the way.

Latest Updates

Taxation

Is there a better way to reform the CGT discount?

The capital gains tax discount is under review, but debate should go beyond its size. Its original purpose, design flaws and distortions suggest Australia could adopt a better, more targeted approach.

Property

It's okay if house prices drop

The assumption that falling house prices are electorally fatal has shaped policy for decades. Evidence from upzoning suggests affordability can improve without reducing overall housing wealth.

Investment strategies

Investment bonds for intergenerational wealth transfer

Investment bonds can be a versatile and a tax-effective option for building wealth for longer-term investment goals. They can also be used as an estate planning tool, enabling the smooth transfer of wealth to younger generations.

Investment strategies

Why switching to income may make sense in 2026

Investors are jumpy as valuations continue to rise and income investing may provide a respite. In a challenging market for income investing AML offers their top picks.

Interviews

Retiring Schroders boss on lessons he’s learned, industry changes, and the market outlook

CEO Simon Doyle is retiring after 38 years in the finance industry. In an interview with James Gruber, he shares the three main lessons he’s learned, and where he sees opportunities and risks in markets today.

Investment strategies

How US midterm elections affect the markets

Investors may overlook the US midterms amid global events, but they could still impact markets. History shows markets react during midterm years, with increased volatility and lower returns. Will this year be any different?

Investing

Does increasing geopolitical risk lead to higher equity market returns?

Increasing geopolitical tensions has investors on edge but one study shows evidence of a war premium for equity markets.

Sponsors

Alliances

© 2026 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.