Rising rates will punish bonds, making REITs, MLPs and other vehicles more attractive t’s been a pretty good year for bond investors, considering. Sure, yields are in the cellar, but thanks to a dip in interest rates since January, people have actually made money on bond investments. Consider the iShares Barclays 20+ Year Treasury Bond ETF TLT, +0.52% which has soared 15% this year, double that of the S&P 500 Index of the largest U.S. stocks. The thing is, though, bonds aren’t going to be a great investment for long. It’s almost certain that the Federal Reserve will raise rates in the next year to 18 months, given the pace of the economic recovery. Inflation is relatively low based on the Fed’s preferred measure of personal consumption expenditures, but is indeed above the central bank’s 2% target; furthermore, unemployment continues to improve and the current rate of 6.2% is below the Fed’s previously stated target of 6.5%. What with the end of quantitative easing in October and the economy improving, there could be serious interest-rate risk to bond fund investors. So rather than buy a long-term bond fund like the iShares Barclays 20+ Year Treasury Bond ETF, which TLT, +0.52% could suffer a decline in principal in a rising-rate environment, here are some alternative-income investments you may want to consider: MLPs as a bond alternative: Sure, the weird jargon about master limited partnership units and distributions instead of shares and dividends gets tiresome. And, sure, the K-1 forms and unique tax structure that come with these partnerships can cause even a trained accountant to scratch her head. But if you want reliable and significant income, MLPs are a great tool for your portfolio. 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. MLP trades I like now: I like the diversification of MLP funds that spread out risk, and at the top of my list is the ETRACS Alerian MLP Infrastructure Index ETNMLPI, +0.09% 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. Based on the last distribution of about 46 cents in July, this fund yields a nice 4%. An added bonus is that the ETN is structured in a way that you avoid the headaches of K-1 tax forms. This MLP fund is up 15% this year on share price alone, in addition to paying a good yield, so it’s worth a look. If you want bigger yields, of course, you can seek individual MLPs. One on my radar is Energy Transfer Partners ETP, -0.97% which yields about 6.8%. The shares have been volatile, but it’s bigger than many options with a market cap of over $18 billion. In addition to reliable cash flow, it also has big growth plans via an 820-mile pipeline project that will connect the Marcellus and Utica shale fields — along with an April agreement to buy Susser HoldingsSUSS, -0.32% If these pay off, expect distributions to keep rising. REITs as a bond alternative: Like MLPs, real estate investment trusts are structured in a way that pretty much mandates big dividends. By law, 90% of taxable income must be returned to REIT shareholders. The challenge, of course, is the balance between the desire for big yield in REITs and the desire to avoid big risk if you’re truly looking for a bond-like alternative. Among the different flavors of real estate investment trusts, I don’t trust REITs that deal with mortgage paper right now since spreads could keep rising. That will act as an anchor on both book values and on dividend potential in these companies. A much safer bet for income investors, in my book, and one that I’ve touted several times in my recent MarketWatch columns, are REITs that deal with health-care properties. 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. If you can find a REIT that owns or leases these kinds of health-care properties, it’s a great way to get good yield without taking on large risks. REIT trades I like now: Among individual REITs, I like HCP HCP, +0.65% in large part, because of its focus on senior housing. This health-care REIT yields over 5.1%, and the shares are up over 17% in 2014. Furthermore, HCP has a very low beta of under 0.6 right now, meaning it moves much less than the broader market, and is a great hedge against low volatility. The company also trades at a fair 13 times fiscal 2015 earnings forecasts so it feels lower risk than many REITs out there. If you want diversification, however, the Vanguard REIT ETF VNQ, -0.01% is a good option. It has a number of health-care-focused plays as its top components — including HCP as well as Ventas VTR, +0.44% and the aptly named Health Care REIT HCN, +0.18% in three of the top eight spots. Overall, it’s about 13% weighted toward health care, and is a great diversified REIT play. You’ll give up a little bit of income, of course, since the Vanguard REIT ETFVNQ, -0.01% yields about 3.7% today. But it’s super-cheap at just $10 per $10,000 invested and is up an impressive 19% this year. Preferred stock: Remember when Bank of America BAC, -1.17% was cratering and paying a measly penny-per-share dividend, but Warren Buffett and Berkshire Hathaway BRK.B, -0.30% rode in to buy a boatload of preferred stock with a 6% yield? The scale, and shrewd timing, of that deal was classic Buffett. But the fact that these preferred shares yielded a great dividend even as common shares paid squat is a powerful illustration of the “preferred” status of preferred stock. 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. Also, while preferred stockholders get a little preference in the event of bankruptcy, they come after bondholders and debt obligations. Anyway, the hybrid nature of preferred stock allows it to avoid some of the interest-rate risk that long-term government and corporate bonds will suffer in the next year or so. Preferred stock trades I like now: Even if, in some cases, it is possible to buy individual preferred shares, I don’t advise it. Much like buying individual bonds, I believe diversification is crucial and that a true assessment of risk in an individual investment is very difficult for a regular investor to do well. Thankfully, there are preferred stock funds just like there are bond funds. One of the big guys in the space is the iShares U.S. Preferred Stock ETFPFF, +0.05% with $10.5 billion in assets and a seven-year track record. Other preferred funds may offer bigger yields but have only popped up a few years ago. The iShares U.S. Preferred Stock ETF PFF, +0.05% offers a yield of 5.7% currently, and it’s up about 9% in 2014 to outperform the market. I don’t expect outperformance to continue, given the sleepy nature of preferreds, but it’s a nice sweetener. Of course, it’s worth noting that many preferred funds are heavy into financials; the iShares U.S. Preferred Stock ETF PFF, +0.05% has 35% of its assets in banks, for instance. If you already have modest exposure via common stock in financials, it may not make sense to go overboard with preferreds in financials, too. In that case, the Market Vectors Preferred Securities ex-Financials PFXF, +0.10%is a unique option. It actually yields a bit more, at 6% today, so you won’t be sacrificing income for that pivot in strategy. And the shares have also outperformed in 2014, with a 10% return.http://www.marketwatch.com/story/with-bond-boom-ending-switch-into-these-alternatives-2014-08-28?page=2