Where investors are finding income outside traditional bonds as rates rise

• Insurance-linked securities like catastrophe bonds offer mid-to-high single-digit returns with performance not directly tied to traditional markets, though returns can turn negative during years with unusually high natural disasters.
• Asset-backed securities from private lending against real assets (rail cars, gas wells, hard collateral) are generating tax-deferred yields in the 6%-10% range with shorter durations of one-to-three years.
• Advisors warn that generating alternative income requires accepting different risk profiles: equity-based options like REITs and dividend stocks add market volatility, while some popular income plays remain interest-rate sensitive, partially defeating the purpose of moving away from traditional bonds.

Summary: Alternative Income Investments Beyond Traditional Bonds

As interest rate volatility continues, financial advisors are diversifying client portfolios beyond traditional bonds while maintaining some fixed-income exposure. Many are shifting to lower-duration alternatives like ultra-short bonds and exploring non-fixed income products that generate current income, albeit with added risk.

Key Investment Categories:

Non-Traditional Fixed Income:

• Catastrophe bonds: Offering mid-to-high single-digit returns, these insurance-linked securities transfer natural disaster risk to investors. TwinFocus Capital allocates 3-5% to cat bonds. The Victory Pioneer CAT Bond Fund and Brookmont Catastrophic Bond ETF (NYSEARCA:CBCAX, 5.57% YTD return) are available options.

Income-Generating Equities:

• Dividend stocks: Provide income through capital appreciation and dividend growth, though with higher volatility. Top ETF options include Capital Group Dividend Value ETF, Fidelity High Dividend ETF, and JPMorgan Dividend Leaders ETF.
• REITs: Offer income via dividends and capital gains but carry more volatility than bonds.
• Master Limited Partnerships: Energy sector investments offering high yields (Global X MLP ETF: 6.82% 30-day SEC yield), though less attractive with 10-year Treasury rates in the upper 4% range.
• Preferred stocks: Senior to common stock, providing ongoing income but sensitive to interest rates (iShares Preferred Stock ETF: 6.52% yield).

Alternative Strategies:

• Merger arbitrage: Exploits price gaps between merger announcements and completion, offering bond-like returns uncorrelated with interest rates. ETF options include NYLIM Merger Arbitrage ETF and IQ Merger Arbitrage ETF.
• Asset-backed securities: Private lending against real assets generating 6-10% tax-deferred yields with 1-3 year durations.

Critical Caveat: Higher yields require accepting greater risk, and many income-oriented investments remain interest-rate sensitive, requiring careful portfolio diversification.