The Best Income Investment Now Is…

Income investments are a big focus in many retirement accounts these days. But finding the best income investments right now is no easy task, considering the possibility of an interest-rate hike disrupting bonds or the risk of a market downturn holding back dividend stocks.

mlp, epb, kmp

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Sure, it’s been a pretty good year for bond investors. Thanks to a dip in interest rates since January, bonds have appreciated nicely. Consider the iShares Barclays 20+ Year Treasury Bond ETF (TLT), which has soared 15% this year, roughly double the gains of the S&P 500.

But long-term bond funds — the staple of many income investors — might be a bad bet at current levels. The Federal Reserve is likely to raise rates in the next 12 to 18 months, and even without a headline increase in the Fed funds rate, we could see rates march up on their own.

Given the inverse relationship between rates and bond prices, any decent uptick in interest rates could mean a lot of pain for long-term bond investments.

Of course, that loss in principle for long-term bond funds could be better than a steep correction in the stock market that takes a bite out of your dividend stocks.

So where should investors turn if they are looking for the best income investments right now?

MLPs – Your Best Income Bet

If push comes to shove, MLPs — a pretty good bond alternative because of their stability, high yields and low beta — are probably your best income investment in this environment.

I particularly like “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.

Especially if you invest in an MLP ETF that adds some diversification to the mix, you can have confidence that this asset class will throw off the income you need without big risk.

At the top of my list is the Etracs Alerian MLP Infrastructure Index ETN (MLPI) because it focuses largely on this “toll taker” segment I mentioned, via pipeline and storage companies. Furthermore, only six holdings have an allocation of over 5% and no component has a weighting of over 10% of the entire fund; other MLP funds are more top-heavy with their major components.

Top holdings right now are Enterprise Produce Partners, LP (EPD), Kinder Morgan Energy Partners, LP (KMP) and Plains All American Pipeline, LP (PAA).

Based on the last distribution of about 46 cents in July, this fund yields a nice 4%. Meanwhile, expenses are reasonable at 0.85%, or $85 for every $10,000 invested.

An added bonus is that the fund is structured in a way — namely, as an exchange-traded note — that you avoid the headaches of K-1 tax forms.

If you’re looking for yield but are leery of bonds right now, take a look at MLPs – particularly the MLPI fund.

Jeff Reeves is the editor of and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at or follow him on Twitter via @JeffReevesIP

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