Looking for an Oasis or Two in a Yield Desert

Volatility seems to have ground to a halt. For many big market drivers, such as the Federal Reserve, fiscal policy, taxes and whether inflation is transitory or not, we won't get much conclusive information in the coming weeks. VIX is at post-pandemic lows, which seems reasonable. So let's do a quick assessment on income-producing assets. Dividend stocks These are probably my favorite income producer right now. I continue to expect inflation to be persistent and dividend stocks as a whole offer the best protection against that. There is a risk of a pullback given current valuations, but if I am correct and real growth is going to be persistent, dragging inflation higher, these stocks offer good returns with manageable risk. Master limited partnerships (MLPs) remain high on my list here. The recent dip has created some buying opportunities (Alerian MLP EFT isn't a well-structured ETF, but it can be used if you don't have a basket of specific MLPs that you like). TIPS Ironically, despite believing in inflation for the longer term, I'd take profits on TIPS (Treasury Inflation Protected Bonds). While I expect inflation to rise, the initial phase of the market pricing that in would look an awful lot like what happened in January and February this year -- lower TIPS prices. TIPS respond well over time to higher inflation, but in the interim can be dragged down as overall yields move higher. It is counterintuitive to say I believe in inflation but would sell TIPS right now, but that is what I'd advocate. Reduce duration risk Given my statement above, I'd reduce anything with duration risk. The 10-year Treasury yield is back below 1.5%, but my base case is for that to push higher. That would mean to avoid things like longer-dated Treasury funds (such as iShares 20+ Year Treasury Bond ETF ) or longer- dated investment-grade funds (such as Vanguard Long-term Corporate Bond Index Fund and iShares iBoxx Investment Grade Corporate Bond ETF ). Credit is OK I am not worried about credit spreads at all. High yield (iShares iBoxx High Yield Corporate Bond ETF , SPDR Bloomberg Barclays High Yield Bond ETF ) and leveraged loans (Invesco Senior Loan ETF , SPDR Blackstone Senior Loan ETF ), despite being at record low yields in many cases, are fairly priced. Embrace structured risk Business development companies (BDCs) are a slightly dangerous way to play this space, but it is possible. For the less-risk averse I like some of the CLO (collateralized loan obligation) linked products. Janus Henderson AAA CLO ETF is a AAA CLO product, where my only complaint is that it is too safe. A 0.25% management fee on AAA tranches of CLOs cuts an already low yield even lower. I'd gravitate toward asset managers who are more comfortable in the BBB range of structured credit risk. There is still value there. I've mentioned my friends at Palmer Square who have several funds, but there are other good asset managers in the space. Closed-end funds Despite minimal discounts to net asset value (NAV), I'd gravitate to closed-end funds in loans and private debt. I recently told a very large asset manager that structured risk sows the seeds of its own destruction, but that doesn't mean it isn't a good time to add structured credit risk. This is my current best attempt at trying to slake my thirst on the income side in what has become a yield desert again.

Looking for an Oasis or Two in a Yield Desert

Dividend stocks are swell, but for those willing to take on risk there are other options.

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