John Swift, the CEO and chief investment officer at Benchmark Investment Advisors, has an idea for income seekers: "I might suggest focusing on how rising interest rates would adversely affect fixed-payment securities and high-dividend-yielding stocks, and that perhaps a portion of an individual portfolio should be allocated to variable-rate, floating-rate and inflation-indexed securities."
In addition to buying inflation-protected Treasury bonds directly from treasurydirect.gov, Swift also likes the Fidelity Floating Rate High Income Fund (FFRHX) as the floating rate loan fund option.
"REITs generally do relatively well in rising-interest-rate environments, as real estate prices often move in sync with inflation and interest rates," he says.
Swift prefers diversified REIT funds such as Vanguard REIT ETFs (VNQ) or (VGSLX) , or T. Rowe Price Real Estate (TRREX) . Financials are also a good bet as the spread between short and long rates widens. Bank of New York Mellon (BK) and Action Alerts PLUS holding JPMorgan Chase (JPM) are his best bets here.
Another chief investment officer also favors floating-rate securities.
"We have generally been credit-heavy in our bond portfolios for much of the post-crisis period, which of course, has its yield advantages," says John Maher, the chief investment officer at CCR Wealth Management.
"These days, tweaks to this type of portfolio can be made to include more senior floating-rate type strategies, which offer a decent yield and are insulated from much interest-rate risk."
Understand, though, that one is replacing interest-rate risk with credit risk, Maher warned.
Additionally, he said, CCR Wealth Management has been allocating more to municipal strategies, where appropriate, as munis have a somewhat lower duration sensitivity vs. their taxable counterparts.
"Perhaps the most important thing investors should be doing though is to think of their portfolios in the 'total return' context -- and cease mentally separating out 'yield' as a major requirement," says Maher. "If 'yield' for income is the dominant objective, then investors will invariably push themselves further out on the risk spectrum to achieve it -- and we have seen this happen over the past nine years or so."
Long-term capital gains and dividend/income tax rates are negligible for many (and most if CCR is using munis). "Investors should maximize diversification across both asset classes and sectors, choose a sustainable portfolio yield, and achieve it through a combination of yield, and small periodic liquidations," said Maher.
An MLP With a Twist
Another option to consider: Tom Weary, the chief investment officer of Lau Associates, suggests looking at the Oppenheimer SteelPath MLP Select 40 (MLPFX) , which gets a four- star rating from Morningstar.
According to Weary, Oppenheimer Funds adopted a mutual fund run by SteelPath, a group of former Goldman Sachs energy investors, which holds 40 Master Limited Partnerships focused on energy infrastructure (primarily oil and gas pipelines).
"The MLPs pass income through to the fund, resulting in a high yield, currently 8.61%, but since it is a '40 Act, fund investors receive a 1099 at year-end, not a K-1, which their accountants will appreciate," says Weary.
"Returns have consistently been in the top quintile and the expense ratio is 85 basis points. Most of the income is recharacterized as return of principal at year-end, which offer a tax advantage for some investors."
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