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Tickers in this Article: ENY, KY, GSG, PWE, PAA, ECA, MMP
Investors, especially those nearing or in retirement, are facing a quandary; providing themselves with the income they need, while keeping the cold hand of inflation at bay. As the central banks and governments of the world enact massive stimulus projects to jump-start the failing global economy, they created the potential for serious repercussions. With inflation rearing its ugly head, commodities are becoming more and more of an important part to an investor's overall portfolio.

Analysts, myself included, have been recommending holding securities such as iShares S&P GSCI Commodity-Indexed Trust (NYSE:GSG), which hold individual futures contracts on several different commodities. These can be great long-term holdings for several different reasons. (Please see The One, Two, Three Commodity Knock-Out .) However, one of the problems with these commodities futures funds is that there are no dividend or income payments associated with them. Some do pay the interest earned on the Treasury bonds used for collateralization, but that is a different story altogether. Luckily, there are ways for investors seeking income to hedge themselves against inflation. Let's look at a few here.

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Royalty Trusts
Canadian royalty trusts, or Canroys, offer investors an interesting way to profit from the rise in oil and gas prices. Designed as pass-through entities, Canroys funnel much of their cash flow back to investors. As oil and natural gas prices rise, so do the dividend payments. However, Canroys are not perfect. With the recent global crisis and falling crude prices, many in the sector have had to cut distributions to unit holders. Even with the cuts, many are still yielding more than 10%. To make matters worse, the Canadian government enacted laws in 2006 that remove many of the taxation benefits that the royalty trusts receive starting in 2011. (See An Introduction To Canadian Income Trusts to learn more)

Nevertheless, many of the old trusts have been grandfathered in via built-up tax breaks and can continue to operate in their present structures. Given the changes in crude oil prices and legislation, investors wanting to participate in the sector would be best suited in the form of a basket of individual Canroys. The Claymore/SWM Canadian Energy Income (NYSE:ENY) ETF holds 25 different Canroys as well as a few other high-yielding Canadian energy companies. These include positions in Penn West Energy (NYSE: PWE), including natural gas superstar EnCana (NYSE:ECA). The ETF currently charges 0.65% in expenses and has a trailing 12-month distribution yield of more than 5%. The Claymore fund is up more than 20% year to date. Pipeline Payouts
A good place for investors seeking high yields and inflation-beating distribution increases in the oil patch is in the world of energy infrastructure. This includes assets that are used in gathering and processing, pipelines for transportation and various storage facilities. As the largest closed-end fund devoted to the space, the Kayne Anderson MLP Investment Company (NYSE:KYN) provides investors an easy way to participate in the world of master limited partnerships (MLP). The fund produces a 1099 Form instead of multiple K-1 statements and does not produce any unrelated business taxable income (UBTI), so it can be held in IRA accounts. The fund currently yields 9.5% through its holdings in top MLPs such as Plains All American Pipelines (NYSE:PAA) and Magellan Midstream (NYSE:MMP). The fund currently trades at an 11% premium to its NAV.

Bottom Line
While commodities futures funds are finding their place in investors' portfolios as inflation hedges, they do lack the important feature of providing dividend income. But, by using the plethora of exchange-traded products on the market, investors can earn income from commodities. The previously mentioned funds offer investors a good way to start that process.

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