The 3 Best Income Stocks to Buy in a Rising-Interest-Rate Scenario

Rising rates mean many risk-averse investors are flocking to short-term Treasuries, but for traders who prefer a little more action with greater upside potential, income stocks are having their moment in the spotlight. Dividend and stable, high-yield stocks offer reasonably predictable income without sacrificing market excitement or capital return opportunity.

Although today’s 5.08% Federal Funds rate is closer to the central bank’s stated 5.25% goal, sticky inflation and continued economic concerns mean the rate will likely continue rising or remain elevated even if the pace slows. Rate risk means stocks are still struggling, but signs of recovery are slowly emerging, even as debt-ceiling drama makes the market jittery.

It’s no wonder savvy investors are increasingly drawn to equities with a high dividend yield, but investing in income stocks alone isn’t a winning play. Instead, investors must closely examine underlying fundamentals to ensure their picks are the best income stocks for rising interest rates.

Omnicom Group (OMC)

TTM Yield: 6.35%

Omnicom Group (NYSE:OMC), a major player in the advertising world, operates under the radar but profoundly impacts your daily consumer experience. Serving industry giants such as Apple (NASDAQ:AAPL) and McDonald’s (NYSE:MCD), Omnicom’s impressive adaptation to the digital age means it’s here to stay with plans for Web 3 expansion. This successful transition and continuous innovation hint at sustained growth in an increasingly digitalized global market.

Omnicom bolsters a substantial and reliable dividend yield through strategic stock buybacks, reducing the number of shares in circulation and boosting prices for those remaining. Prudently, its management prefers staking excess earnings on improving shareholder positioning instead of speculative expansion in today’s economy. The technique offers an arguably superior return by limiting the tax implications for investors.

Still, with a payout ratio comfortably under 50%, Omnicom retains a significant cash reserve, empowering it to seize opportunities for expansion and acquisitions in the evolving advertising landscape.

A distinguishing feature of Omnicom’s corporate resiliency trajectory is its predominantly organic and grassroots operations rather than a reliance on acquiring smaller companies or merging with rivals. This testifies to the firm’s robust adaptability and potential for future market capture as less well-managed competitors falter when facing higher interest rates.

Medtronic (MDT)

TTM Yield: 4.43%

The rollercoaster ride of medical stocks during the pandemic understandably created an air of caution among investors. Medtronic Plc (NYSE:MDT) was not immune, as its share price fell ill compared to its peak during the health crisis. Surprising many, though, Medtronic went off life support and is gradually recovering in 2023.

Despite setbacks, the current pricing offers an income antidote when viewed in conjunction with Medtronic’s steadfast commitment to its dividend program. The firm has a nearly five-decade history of consistent dividend increases. Additionally, the CFO pledged a return of at least half its free cash flow to shareholders through 2023.

As a recognized innovator and medical device industry leader, Medtronic capitalizes on its innovative culture to engage in cooperative, risk-based agreements with hospital networks. These partnerships aim to enhance patient outcomes and curb healthcare costs, making Medtronic an appealing collaborator in a climate of escalating healthcare expenses. This strategy and its continuous technological advancements suggest that Medtronic could be poised for future growth while maintaining its status as a top income stock today. 

Realty Income (O)

TTM Yield: 4.96%

Income-focused investors should also consider Realty Income (NYSE:O), a real estate investment trust (REIT) widely known as the “monthly dividend company.” Its commitment to delivering monthly dividends makes it a unique proposition in an uncertain market environment, even as the broad real estate sector begins stumbling.

With a solid portfolio of commercial properties and consistent occupancy rates, Realty Income consistently distributes dividends to its investors. This consistent income stream and potential capital appreciation make it a go-to option for income-focused investors navigating a rising interest-rate scenario.

For land-shy investors understandably avoiding real estate due to ballooning mortgages, rest assured that Realty Income’s leasees are as reliable as they come and include consumer staples like FedEx (NYSE:FDX), CVS Health (NYSE:CVS) and Lowe’s (NYSE:LOW).

On the date of publication, Jeremy Flint held a long position in MDT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.