Investors today seek steady, inflation-adjusted income while managing risk and preserving capital. Traditional bonds no longer suffice.

The Case for Expanding Beyond Bonds

Bonds have historically served as the balancing force in a portfolio. They deliver income, preserve capital, and diversify equity exposure. Yet, in the modern era, several factors drive a search for new solutions.

• Fixed coupon payments erode over time as inflation rises.
• Interest rate risk can trigger capital losses when rates climb.
• Periods of positive correlation reduce diversification benefits.
• Yields, while attractive at around 5%+, may lag after-tax returns.

These drivers motivate investors to seek alternative income sources that can outpace inflation and provide genuine diversification.

Bonds as Your Baseline

Before venturing into new areas, bonds remain the benchmark for income.

• Government/Treasury bonds: among the safest income-generating assets with lower yields.
• Investment-grade corporate bonds: higher yields with moderate credit risk.
• High-yield (“junk”) bonds: elevated returns paired with greater default risk.

Key risks include interest rate sensitivity, credit events, inflation erosion, and liquidity constraints. Investors choose between individual bonds—enabling a ladder for predictable cash flows—and bond funds or ETFs, which offer broad exposure but lack maturity guarantees.

Active bond strategies can add value through duration management and credit selection, while passive approaches deliver low-cost market returns. Bonds set the yardstick for comparing yields, risks, correlations, and tax implications in alternative assets.

Equity-Based Income Streams

Equities can amplify income and capital appreciation, offering a dynamic alternative to fixed-income instruments.

Dividend-Paying Stocks: Companies distribute part of their earnings, often growing payouts over time. This provides income plus potential growth. Dividend stocks historically yield more than many investment-grade bonds and can serve as a partial inflation hedge through payout increases.

However, volatility is higher and dividends may be reduced in downturns. Investors can access individual names or opt for dividend-focused ETFs, which deliver diversification and simpler execution.

Covered Call Strategies: By owning stocks and selling call options on them, investors collect option premiums to boost yield. This approach offers enhanced income with modest downside cushioning but caps upside if shares rally sharply. Covered call ETFs enable a turnkey solution for those less comfortable with options trading.

Real Assets: Real Estate and Infrastructure

Real assets introduce tangible exposure with distinct risk-return profiles and inflation-linked characteristics.

REITs (Real Estate Investment Trusts): Publicly traded vehicles that own income-producing properties across commercial, residential, and specialty sectors. They pay out most taxable income as dividends, yielding higher than many bonds. REITs can act as an inflation hedge potential when rents and property values rise.

Risks include stock-like volatility, interest-rate sensitivity, and ordinary income tax treatment in many jurisdictions. Global or thematic REIT ETFs help diversify across geographies and property types.

Infrastructure Debt: Loans to essential public assets—transportation, energy, utilities—often backed by regulated cash flows or government support. These instruments deliver predictable, resilient yields and typically exhibit low default rates. Infrastructure equity can also provide dividends but brings greater market risk.

Alternative Credit and Liquid Strategies

Beyond public bond markets, alternative credit offers higher yields and unique diversification.

Peer-to-Peer Lending: Digital platforms match investors with consumer or SME borrowers. Yields may surpass traditional bonds, but credit and platform risk require careful due diligence. Platforms like Mintos and Robocash showcase the potential and pitfalls of marketplace lending.

Private Credit: Direct lending to mid-market companies or real estate developers, often secured and with floating rates. These deals can produce yields in the mid to high single digits, though illiquidity and covenant structures demand expertise and longer lock-ups.

Liquid Alternatives: Hedge fund-like strategies packaged in mutual funds or ETFs. These employ long/short equity, managed futures, or multi-strategy approaches aimed at uncorrelated returns. While fees may be higher, they can complement traditional bond allocations by smoothing volatility and adding return streams.

Comparing Yields, Risks, and Tax Considerations

Constructing a Diversified Income Portfolio

Building a robust portfolio begins with defining goals: target yield, risk tolerance, liquidity needs, and tax considerations. Blend assets across the spectrum:

1. Establish a core of high-quality bonds for stability.

2. Layer in dividend-paying equities and covered call strategies to enhance yield and growth potential.

3. Add exposure to real assets like REITs and infrastructure debt to capture inflation-linked income.

4. Allocate a smaller portion to private credit or peer-to-peer lending, mindful of liquidity constraints.

5. Consider liquid alternative funds to smooth volatility and introduce nontraditional return drivers.

Rebalance periodically to maintain target allocations and reinvest distributions to compound growth.

Conclusion

In a climate where bonds alone may not deliver real income-generating assets that stay ahead of inflation, a diversified approach is essential. By combining traditional fixed income with equities, real assets, private credit, and liquid alternatives, investors can craft resilient portfolios that pursue income, growth, and diversification in unison. The path beyond bonds demands diligence, ongoing monitoring, and a willingness to explore diverse sources of yield, but the reward is a portfolio poised to thrive in varied market environments.