Income Alternatives

Addressing the needs of today’s investors has become a complex challenge. With investors fearful of rising interest rates and inherent risks, the search for alternative investment strategies that attempt to produce consistent income may be more important than ever.

With the prospect of tapering from the Federal Reserve on its economic stimulus program, last year cultivated an impressive flight from bond funds, with capital outflows reaching over $13B. (Source: Trim Tabs Investment Research)

Rising interest rates are a threat to investors with their effect of pushing bond prices lower, making them less valuable which can have a negative effect on dividends and income for investors with allocations to that asset class.

In a rising interest rate environment, investors seeking income producing options may redirect funds into income alternatives such as; real estate investment trusts, master limited partnerships, closed-end funds, royalty trusts, business development companies — collectively known as pass-through securities.

Pass-through securities represent a major opportunity for investors who may be concerned over the very low yields of traditional fixed income investments, or the potentially high volatility and unpredictability of equities. These pass-through securities, or income alternatives, can offer the ability to provide:

  • Atractive yields
  • Inflation-protected income

The use of pass-through securities as an alternative source of income can bring significant value, especially in today’s low-income environment from traditional sources. While pass-through securities have been slightly more volatile than bonds, an allocation with a traditional bond and stock portfolio may provide additional diversification by offering attractive yields and the prospect of inflation protected income.