As the new yield reality bites, where should Aussies turn for income?

Aussies usually love new experiences, but over Easter there was one they didn’t enjoy – worrying about whether they’d be able to fill up the car with petrol to go on holiday. It has become cliched to talk about how uncertain the world is, but when we can’t even take these basics for granted, then it’s clear things are a bit shaky right now. And when we move to financial markets, hold onto your hat!

While the rollercoaster ride of equity markets this year has hogged the headlines, for many Australian investors, particularly retirees, what’s been happening in the world of income investing is of greater long-term consequence. Australia has been a great place to invest for income for many years, but things are changing.

Australian equities have historically paid higher dividends than international shares, and bank hybrids have paid good levels of income for minimal risk. However:

• Bank hybrids are being phased out, starting on 1 January next year¹.
• Dividend income is dropping – it’s at around 3.2% right now for the ASX300, down from the long-term average of 4.4%²

And then there’s private credit. Many investors turned to private credit for income in the years of ultra-low interest rates, however now its drawbacks are becoming clear. There are increasing rumblings that all is not well in private credit and many of the world’s biggest private credit providers - like Apollo, BlackRock and Blue Owl - are limiting withdrawals and, with the opaque nature of private credit, it’s hard for most people to know how concerned they should be about this.

Where should Australian investors turn for income?

For me, there’s one obvious place which many Australian investors don’t seem to appreciate – fixed income (bonds). In my role I talk to a lot of people who advise Australians on their financial futures – from superannuation funds to independent financial advisers and everyone in-between. I had always found it odd how many of them said their clients weren’t particularly interested in bonds but it wasn’t until I saw the stats from our Individual Investor Survey³ that I realised how underinvested we really are: 22% of Australians say they hold bonds, versus a global average of 48%.

So why don’t Australians invest in bonds?

I think the main reason is that bonds are boring. They offer dependable income and solid returns over time, but none of the excitement of sharemarkets. And because they’re not interested in them, many Australians don’t understand them. In the same survey only 43% of Australian investors said they understood the purpose of bonds in a portfolio, the lowest score of the 20 countries surveyed and significantly lower than the global average of 65%. 

Why invest in bonds?

While it’s true that returns from fixed income are lower than equities over the long term, overall they have lower risk, are less volatile and offer a stable  income stream. Yields are also much higher than during the period of ultra-low interest rates, and if the RBA continues raising rates , they’ll become even more attractive.

Bonds are not only attractive in themselves, they play a useful role as part of an overall investment portfolio. Investors have traditionally used bonds as a safety net for shares. Bonds often (though not always) go up when shares fall and so reduce the likelihood that investors need to sell their shares at the bottom and so lock in their losses. Holding bonds as well as equities (and other asset classes) diversifies your investments, so reducing the overall risk of your portfolio and improving your ‘risk-adjusted’ returns.

And while bond prices can be volatile, there is one crucial difference between bonds and equities and most other asset classes. If you don’t NEED to sell, you can just ignore the volatility and hold on to your bond until it matures and get your initial investment back, while of course picking up regular income (coupons) along the way. Of course, if the organisation you bought your bond from defaults on their debt you won’t get the money back, but all bonds are ranked by ratings agencies, and by active managers, for their risk levels and any ‘investment grade’ bonds have lower risk of default.

There are many different types of bonds, and many different ways of using them – for regular cash flow, for predictability and planning, to hedge your other investments or as a ‘safe haven’ asset in times of economic turmoil.

How to use bonds in your portfolio

We would always recommend that investors diversify their investments to decrease risk and increase long-term risk-adjusted returns. This doesn’t just apply to investing in different asset classes – like equities, property, private assets, fixed income, and cash – but also diversifying investments within each asset class.

For fixed income, I think individual investors could learn a lot from the way superannuation funds invest. Fixed income occupies around 30-40% of a super fund’s overall invested assets on average, but that won’t all be invested in the same way. Most super funds use a ‘bucketed’ approach, splitting their overall investment into different ‘buckets’ with each having a different goal. Here are some common buckets used by superannuation funds which individual investors could also consider.

Common fixed income buckets

Passive, active, or both?

As well as diversifying their fixed income investments by buckets we would also recommend investors consider both ‘active’ investments, managed by skilled experts, and ‘passive’ investments which track an index.

Passive investing in both equities and fixed income has grown very quickly in recent years and for good reason. Passive funds offer a simple, low-cost way to receive the same returns as the benchmark. However there’s an important distinction investors need to understand between equities and fixed income in this area. For equities, only the most skilled active managers consistently beat their benchmarks, however in fixed income the opposite is true. According to Morningstar’s latest research more than half of Australian bond managers beat their benchmark over 1, 3 and 5-year time periods. And for global bonds more than 95% of managers beat their benchmarks over the same time periods⁴! It’s no wonder that 71% of institutional investors say that active management is essential to fixed income investing⁵.

However Australian investors don’t seem to realise this. Over the last five years $3.6 billion has flowed into active global fixed income funds from Australian retail and wholesale investors, however nearly three times as much has flowed into passive funds in the same period $10.1 billion⁶!

Skilled managers can reduce risk by avoiding companies or countries that are more likely to default on their debts. They can also find opportunities where investments are mispriced, like businesses that are misunderstood by ratings agencies or the market and so offer higher yields for little extra risk. This is even more true for markets like global fixed income, which has a total size of more than $100,000 billion compared to the Australian bond market which has around $1,700 billion⁷. 

Relative size of fixed income markets

Source: Bloomberg. Data as of 31 December 2025. Global fixed income measured as Bloomberg Global Aggregate Index, Australian bond markets measured as Bloomberg AusBond Composite.

With a world and a global economy that is very volatile and unpredictable right now, it feels like a pretty good time to give more of my investments to people and companies that I trust. And many Australians seem to agree with me. In our survey I mentioned above four fifths (80%) of Australian investors said 'if forced to choose, I would take safety over performance’. But while this is what Australians say, very few of them are invested in fixed income, and even fewer have been putting money into actively managed, global fixed income lately. As we continue to move through this challenging market cycle, with Australian income harder to come by and less reliable, I think this is likely to change.