Income investments outperform broader equities as rates rise

OWith bonds and stocks off to a dismal start to the year and a growing chorus of talk about the potential for a recession, income investors could take a closer look at their portfolio positioning as they assimilate performance. recent developments in a context of rising interest rates. Year-to-date, returns for typical income investments have admittedly been mixed, ranging from outright strength in energy infrastructure to resilience in utilities to general weakness in closed-end funds. That said, income investments have generally outperformed the -12.9% decline in the S&P 500 (SPX) on a total return basis through April. Certainly, some of the outperformance of income investments can be attributed to the avoidance of weaker sectors like technology and communication services. This note discusses the year-to-date performance of income-generating investments as interest rates have risen.

The energy infrastructure has stood out for its solidity since the beginning of the year.
An improving macro-energy environment, driven by higher oil and natural gas prices, has supported energy infrastructure performance this year, with an overall increase of 21.3% and MLPs up 18 .7% based on total return through April. Energy infrastructure tends to do well during periods of high inflation given the inherent exposure to real assets and long-term contracts that typically include annual inflation adjustments. Consistent with performance so far this year, rising interest rates should not be a headwind for energy infrastructure companies. The focus on debt reduction in recent years should help mitigate the impact of rising rates on borrowing costs, and more generous yields from intermediaries/MLPs would suggest some protection against increased competition from bonds as rates rise (learn more). As shown below, MLPs were returning almost 7.5% at the end of April, while the broader medians were returning 5.6%.

Equally weighted indexes focused on yield and utilities are holding up well.
Part of the relative strength of income investments versus the SPX results from less exposure to sectors that have been particularly weak this year, namely technology, consumer discretionary and communication services. As the chart shows, these sectors combined accounted for 47.5% of the SPX at the end of April, and each sector is down about 20% year-to-date. The advantage of having less exposure to these sectors is evident in the performance of the S-Network Sector Dividends Dogs Index (SDOGX), which is the underlying index of the ALPS Sector Dividend Dogs ETF (SDOG). SDOGX selects the five highest paying stocks in each sector of the S&P 500 (excluding real estate) and applies an equal weighting scheme. Compared to the SPX, SDOGX was underweight the three lagging sectors highlighted below and overweight energy, resulting in positive index performance through April.


Utilities also held up well through April, with a slightly positive total return. Utilities tend to be sensitive to rising interest rates given the capital intensive nature of the business and heavy use of debt. However, utilities are also defensive investments with stable income and a decent return. Investors likely shifted more money into utilities amid heightened market volatility.

Closed-end funds lag when interest rates rise.
Closed-end funds (CEFs) can be particularly sensitive to rising interest rates and have performed poorly in 2022. Many closed-end funds focus on fixed-income securities, and rising interest rates interest has a negative impact on the net asset value of these funds because bond prices fall when rates rise. CEFs that use leverage may come under additional pressure, as leverage amplifies returns and borrowing costs also increase. Rising interest rates are also contributing to weaken sentiment towards CEFs. Municipal bond CEFs have been particularly weak, falling nearly 20% on a total return basis year-to-date.

Quality REITs, bonds and dividends are down year-to-date but still outperform broader equities.
To complete the discussion, other income investments are down year-to-date but still outperform the SPX. REITs tend to do well in times of inflation, as they benefit from pricing power and leases with inflation adjustments, but the space has still seen some pressure this year with rising borrowing costs. Quality-focused dividend strategies tended to be more defensive and less exposed to technology, which helped performance. As interest rates rose, bonds fell unsurprisingly, but the benchmark bond indices shown still held up better than the broader market.

Conclusion :
On the heels of a tough April for markets and the Federal Reserve’s policy meeting this week, income-focused investors may find some solace in income vehicles that have largely outperformed the broader stock market. since the beginning of the year, as interest rates have risen.

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Current returns versus history

Even with a strong start to the year, midstream/MLPs continue to offer attractive yields, although current yields are below historical averages.


SDOGX stands out from other dividend dog indices for its positive year-to-date performance. SDOGX’s current performance is below its historical average, but both IDOGX and EDOGX are performing above their five-year average.


Multiple screens for dividend sustainability, including assessing cash flow, EBITDA, and debt ratios, help ensure reliable income from sustainable dividend indices.


Closed-end funds have been under pressure from rising interest rates and the current yield on the CEFX is above its historical averages.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.