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By Ashley Redmond | 10-03-2014 12:00 AM

How Income Investors Can Position for Higher Rates

Diversifying among dividend-paying equities and corporate bonds with positive growth and credit dynamics can help income investors weather the headwinds that come with rising rates, says Franklin Templeton's Ed Perks.

Ashley Redmond: I'm Ashley Redmond for Morningstar, and I'm on the line with Franklin Templeton's Ed Perks. Ed manages the Franklin Income Fund for U.S. and Canadian investors.

Ed, thanks so much for joining me.

Ed Perks: It's good to be with you.

Redmond: The Franklin Income Fund is a Bronze-rated fund in the U.S., and in Canada it's not yet rated because it's just over a year old. The fund takes a similar approach in both countries with the goal of maximizing income while maintaining the prospects for long-term capital appreciation.

So Ed, where are you seeing opportunities in the U.S. market?

Perks: We're really finding opportunities today across a pretty broad spectrum of the markets. That said, our portfolio approach today really does have us a little bit more focus on equity securities, and more specifically the opportunity in dividend-paying stocks.

Now I think it's important, it's not just necessarily the highest-yielding stocks that we're focused on, but also those companies that we think are in a great position in terms of strength of their balance sheet as well as the path they've taken over time in growing their dividend. Dividend growers are a big focus for Franklin Income Fund.

Redmond: And overall for income investors, would you say there's more opportunity right now in stocks or bonds?

Perks: We do still feel like the relative value between stocks and bonds tilts slightly in favor of stocks. So that is more of our focus today.

That said, we have seen some movement in the fixed-income markets, and particularly when you step back on a year-over-year basis and even further back into 2013, we have seen longer-term interest rates move up over that time period. Now clearly year-to-date, they're down a little bit, but that backup in long-term interest rates, as well as some volatility in credit spreads, has created some pockets of opportunity for us in fixed income.

In addition, we've actually seen some increased issuance of convertible securities, an area that also kind of bridges the gap between equity and fixed income, and we've been finding nice opportunities there as well.

Redmond: And within bonds, what's the best bet right now for income investors?

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