Worried about inflation? Here’s where to find income in today’s market

With the oldest baby boomers turning 80 this year and the youngest in their 60s, the ranks of retirees are swelling. A growing cohort of investors is shifting from accumulation mode to living off their portfolios. It’s no surprise, then, that Morningstar Asset Flows Data shows strong interest in income-generating investments.

At the same time, inflation is running hot. The US Consumer Price Index rose 3.8% in April, its acceleration from March levels driven by higher energy costs. Income investors are rightly concerned about preserving their purchasing power.

Given these dynamics, I took a look at yields across Morningstar’s index range. Below, I’ll run through some income sources, along with their pluses and minuses. But first, a couple of caveats. This is not an exhaustive list. And, while I’m not going to cover tax implications, they are a key consideration that some of my colleagues have addressed.

Let’s start with a look at yields on some Morningstar indexes as of April month-end.

Core Bonds

The Morningstar US Core Bond Index, which represents the broad investable universe of high-quality debt securities (mostly Treasuries, corporates, and agency mortgage-backed securities), yields 4.6%. That’s not bad at all. The Morningstar US Core Plus Bond Index, which also includes some higher-yielding areas like high yield, emerging-market debt, and bank loans, yields 4.7%. Both indexes are Treasury-heavy, so investors are right to worry about debt, deficits, and inflation. The double-digit losses of 2022 continue to cast a shadow over core bonds. Indeed, both indexes are slightly negative in 2026, as inflation fears driven by the war in Iran have sent Treasury yields up. Despite the risks, a high-quality bond allocation can still lay claim as a diversifier and portfolio stabilizer. In many historical periods of equity market volatility, Treasuries have acted as a safe-haven asset.

US Dividend Stocks

The Morningstar Dividend Leaders Index, which includes 100 US dividend-paying stocks and weights by dividend dollar, currently yields 4.2%. That’s twice as much as the more diversified, market-cap-weighted Morningstar US High Dividend Yield Index. The leaders index is heavy on the energy, consumer defensives, and healthcare sectors. Dividend-payers are stocks at the end of the day, so they are susceptible to sharp losses. They can also badly underperform the broad equity market when dividend-light areas, like technology, are leading. Finally, when dividend investing, you need to be mindful of yield traps. Higher yields are often found in troubled companies, industries, and sectors. That said, dividend-payers tend to be more stable and secure in their cash flows than non-dividend-payers. Committing to a regular dividend instills discipline into corporate management.

International Dividends

The Morningstar Developed Markets ex-US Dividend Leaders Index yields 5.6%, reflecting fatter yields outside the US. That’s partly because stock price performance in Europe and other markets has been more subdued. It’s also because US companies favor share repurchases over dividends, while the inverse is true internationally. Everything written above about US dividend-payers applies abroad. An added risk is currency. If the dollar appreciates against foreign currencies, unhedged assets lose value. Another risk is double taxation, but that’s outside my scope here.

MLPs

The Morningstar MLP Composite Index, which includes US publicly traded master limited partnerships, currently yields north of 8%. Often referred to as “midstream” or “pipeline” companies, MLPs engage in the transportation, treating, processing, refining, storage, marketing, exploration, and production of natural resources. The upsides of MLPs are yield and capital appreciation potential. When the energy sector is booming, as it has been lately, MLP share prices can soar. The downside is volatility. MLPs are stocks in a narrow niche. Not only are they in the energy sector, but the MLP index is also highly concentrated: The top five constituents currently represent 50% of index weight. In 2020, the index fell 30%, when the overall US stock market was up 21%.

Bank Loans

The Morningstar LSTA US Leveraged Loan Index also yields north of 8%. Bank loans are technically private market transactions. But they are broadly syndicated, are priced daily, and are liquid enough to have been included in exchange-traded funds for 15 years now. The asset class has also grown to surpass US high-yield bonds in size. Thanks to their floating-rate coupons, loan yields don’t respond to interest rate hikes in the same way as bonds. From a correlation perspective, their behavior is more closely tied to stocks than to bonds. Their downside is credit risk. Loans are below-investment-grade. More than 60% of the index weight currently carries a B rating. In February, the index declined 0.78%, its most significant monthly loss since September 2022. Software-related loans, which represented 13% of index weight at the time, were largely to blame. As fixed-income instruments, bank loans tend to be significantly less volatile than equities. But they are significantly more volatile than higher-quality, government-heavy bond allocations.

Global High-Yield Bonds

The Morningstar Global High-Yield Bond Index yields nearly 7%. Once called “junk bonds,” this asset class has since improved from a credit quality perspective. While the upside is less risk, the downside is lower yields compared with bank loans and private credit. Still, high-yield bonds remain a below-investment-grade asset class (with 62% of index weight carrying a BB rating and another 30% a B rating). They also tend to be more correlated with equities than core fixed income and can suffer painful losses during economic downturns when corporate defaults rise.

REITs

The Morningstar Global Markets REIT Index yields 4.1%, which is higher than the US-only version (3.8%) but still a bit underwhelming in relation to fixed income and other areas. Although REITs are publicly listed equities, they are excluded from many dividend indexes because their income is nonqualified. Around this time last year, I wrote about REITs as a contrarian investment opportunity. Since then, they have continued to underperform. A number of factors have weighed on property, including elevated interest rates, challenges to brick-and-mortar retail, and hybrid work. But there are also REITs benefiting from growth trends, including artificial intelligence data centers and healthcare. Similar to MLPs, REIT behavior reflects the volatility inherent in single-sector equities. The upside is capital appreciation potential.

Emerging Markets Debt

The Morningstar Emerging Markets Composite Bond Index yields 5.9%, while the Morningstar Emerging Markets Government Bond Local Currency Index yields 7.1%. Volatility is part and parcel to the asset class. Debt issued by governments and companies in developing economies carries higher credit risk than developed-market debt. The asset class lost several percentage points more than US core bonds in the difficult year of 2022. The upside is yield and capital appreciation potential. Also, countries like Mexico, Saudi Arabia, Brazil, and China don’t look as debt-laden as the US, Japan, and Europe. Currency is both a risk and an opportunity for this asset class. A weakening dollar helps across the board but is an especially powerful tailwind to local-currency debt. That carries a higher yield for a reason and is less diversified by country than hard-currency emerging-market debt (15 countries versus 50).

Don’t Sacrifice Returns in Pursuit of Yield

It’s important to stay risk-aware when investing for income. Higher yields typically come with higher risk. Investors who aren’t prepared to lose principal are best off in cash.

That said, income investors have options in today’s market. Diversification can help mitigate risk, as can a selective approach. For those with realistic expectations, though, above-inflation yields are available in both equities and fixed income.