That possibility that higher inflation will eventually lead to higher rates is increasing the attractiveness of floating-rate assets including preferred stocks and loans from both the US and Canada. Unlike bonds that pay fixed rates of interest, floating-rate assets pay interest at rates that adjust periodically, based on a publicly available, short-term interest rate. That means floating-rate preferreds and loans are less likely than most fixed income investments to lose value when inflation and interest rates rise. While past performance is no guarantee of future results, floating-rate loans and preferreds historically have performed better than longer-duration fixed income bonds in rising rate environments. Remember though, that floating-rate loans are sub-investment grade assets that may be more volatile and present higher credit risk than investment-grade corporate and government bonds.
Master limited partnership (MLP) and clean energy yieldco dividends are another interesting source of income right now, though investing in them is best left to professional managers. MLPs pay the highest yields of any income-oriented asset class and have historically maintained their value in times of inflation. MLPs operate real properties, mostly oil and gas pipelines, and many also continue to be mispriced by the market. Clean energy yieldcos also operate real properties, mostly solar and wind power projects. Many MLPs have been increasing their free cash flows by cutting their capital spending and paying down debt and offer historically attractive yields, compared to high-yield bonds issued by energy companies. MLPs may also benefit if proposed increases in corporate income tax rates come to pass because as partnerships, rather than corporations, they have tax advantages that would become increasingly valuable in a higher tax environment.
Real estate investment trusts (REITs) in the US and Canada may also offer attractive and steady (or even rising) dividends plus the potential for capital appreciation as more people eventually return to offices, stores, and leisure activities. REITs can grow their earnings by raising rents and they pay dividends that are higher than the yields of both the S&P 500 and investment-grade bonds. Despite their improving fundamentals, some REITs are still being underpriced by the market and that's creating opportunities for skilled managers who practice careful security selection. Some of the concern about the persistence of COVID has been priced into casino and shopping mall REITs.
Dividend-paying value stocks from companies including oil producers and gold miners are another potential source of income. These stocks are paying healthy dividends and are also inexpensive by historical standards because investors may be pricing in an eventual rise in real yields. Gold miner stocks usually move with real yields which take into account inflation. If inflation rises and real yields move lower, gold miners and gold itself typically move higher. If real yields rise sharply, then gold miners might sell off, but a lot of that risk is already priced in.
While the market may or may not be correct in pricing in the risk of a rise in real yields, gold miner stocks offer a natural volatility dampener in the event that real yields rise. However, if real yields do not fall sharply, investors may reasonably expect to collect growing dividends and eventual capital appreciation.
Finding ideas
Investors interested in multi-asset income strategies should research professionally managed mutual funds or separately managed accounts. You can run screens using the Mutual Fund Evaluator on Fidelity.com. Below are the results of some illustrative mutual fund screens.
Multi-asset class income funds
Fidelity funds
Fidelity® Multi-Asset Income Fund (FMSDX)
Non-Fidelity funds
BlackRock Multi-Asset Income Portfolio (BAICX)
Invesco Multi-Asset Income Fund (PIAFX)
Separately managed accounts
BlackRock Diversified Income Portfolio