Bonds have defied analysts' expectations this year, rallying despite the Federal Reserve's reduction of its bond purchases.
The Barclays U.S. Universal bond index has returned 5 percent so far this year.
But, "bonds aren't going to be a great investment for long," writes
MarketWatch columnist Jeff Reeves. "It's almost certain that the Federal Reserve will raise rates in the next year to 18 months." And that would mean lower bond prices.
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As an alternative to bonds, Reeves suggests investing in master limited partnerships (MLPs), real estate investment trusts (REITs) and preferred stocks.
• MLPs: they largely consist of oil and gas pipelines. "If you want reliable and significant income, MLPs are a great tool," Reeves says. He suggests "toll taker MLPs that focus on midstream-energy businesses. These energy companies don't have to worry about the risks of energy exploration on the front end or refining and selling on the back end. They simply play middleman, with little exposure to commodity-price fluctuations."
• REITs: Like MLPs, their structure almost guarantees big dividends. "By law, 90 percent of taxable income must be returned to REIT shareholders," he notes, adding that healthcare property REITS look like an attractive sector.
"The demographic tailwind created by aging baby boomers that need more care and the rise in insurance coverage thanks to Obamacare will mean more business for medical offices, physical therapy centers and other facilities."
• Preferred Stocks: You can find tasty yields on blue-chip companies. "Preferred stock is halfway between a bond and a stock. Preferreds have the low volatility and income focus of bonds; however, they are frequently perpetual and without a fixed duration," Reeves explains.
"The hybrid nature of preferred stock allows it to avoid some of the interest-rate risk" that lies ahead for bonds.
As for MLPs, industry titan Kinder Morgan's decision last month to roll up its MLPs into the parent company has sent ripples through the industry.
"Likely key beneficiaries include large-cap and higher-yield MLPs, the two primary investment styles displaced in investors' portfolios by the transaction," Morgan Stanley analysts write in a report obtained by
Barron's.
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