When investors add a commodities component to a portfolio, they generally do so for capital gains exposure. Commodities are seen as the perfect way to add inflation protection. After all, inflation hits most of us in the food we eat and energy we consume.

IN PICTURES: 10 Reasons To Add ETFs To Your Portfolio

Exchange-traded funds such as the Energy Select Sector SPDR (NYSE:XLE) or PowerShares DB Commodity Index Tracking (NYSE:DBC) make perfect portfolio additions for that purpose. However, from an income perspective, both ETFs fall flat. The Energy SPDR actually yields less than the S&P 500 (NYSE:IVV). Those investors looking for income shouldn't fret; there are plenty of options for wages inside the commodities patch.

Beyond MLPs
With the recent launch of the Alerian MLP ETF (Nasdaq:AMLP), portfolios now have six different ways to tap master limited partnerships. These pipelines, storage and terminal operators and their resulting "pass-through" tax structures have become big hits with investors seeking income. This structure allows for MLPs to pay distributions in the 5-7% range, while allowing for certain tax advantages for investors.

Although this sector should be a part of almost any income portfolio, with the recent frenzy, many analysts are calling a top in the sector. It may not be wise to go heavy into security type. The commodities segment offers other income choices beyond the world of MLPs. (For more on MLPs, see Discover Master Limited Partnerships.)

Broad Bets
For investors wanting to stick to the familiarity and safety of diversified exchange-traded funds, some commodities ETFs yield better than others. Canada is known for its vast natural resources including the potential huge oil reserves locked in its oil sands. The Claymore/SWM Canadian Energy Income (NYSE:ENY) follows 26 different Canadian energy firms an yields 3.38%. The fund also functions as away to play the difference in oil and natural gas prices. Holdings within the ETF shift toward oil when oil prices are high and conversely with natural gas when natural gas futures increase.

Internationally, there seems to be more of a dividend culture and the yields of their equities reflect that. Energy companies such as Italy's Eni (NYSE:E) yield more than their domestic counterparts. The WisdomTree International Energy (NYSE:DKA) and its 4.89% distribution yield, follows a basket of 60 of the largest energy companies outside the United States.

Getting Specialized
Timber is emerging as an alternative asset class that can add portfolio diversification benefits and lower volatility. Albeit not a perfect correlation to timber prices, real estate investment trusts that focus their operations on lumber and land management can provide big dividends. Potlatch (NYSE:PCH) owns nearly 1.6 million acres worth of timberlands. Shares of the company currently yield 6.10%. Similarly, rivals Plum Creek Timber (NYSE:PCL) and Rayonier (NYSE:RYN) both yield over 4%.

United States Royalty Trusts, which differ from their Canadian cousins, generate dividend income from the development of natural resources such as coal, natural gas and crude oil. Like MLPs, they pass these dividends onto unit holders. When the price of the underlying commodity is high, so are the distributions. Investors wanting to play the growth in iron ore usage can bet on the Mesabi Trust (NYSE:MSB) and its 12% yield. Natural gas exposure can be had with the Permian Basin Royalty Trust (NYSE:PBT) and Cross Timbers Royalty Trust (NYSE:CRT). Both yield around 7.2%

The Bottom Line
Investors often look to commodities as inflation fighters and capital gain makers in a portfolio. However, income options exist as well. Investors looking to add yield to a portfolio can look past the heavily traded commodities ETFs such as the Market Vectors Steel ETF (NYSE:SLX) and look at some of the alternatives. The previously mentioned stocks and funds are a good place to start.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: First Trust Dorsey Wright Focus 5

    Take a closer look at the First Trust Dorsey Wright Focus 5 ETF, a unique and innovative fund of funds based on momentum and relative strength.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares National AMT-Free Muni Bond

    Take an in-depth look at the iShares National AMT-Free Municipal Bond ETF, a highly diverse and very popular muni bond fund.
  3. Mutual Funds & ETFs

    Top 3 Switzerland ETFs

    Explore detailed analysis and information of the top three Swiss exchange-traded funds that offer exposure to the Swiss equities market.
  4. Mutual Funds & ETFs

    7 Best ETF Trading Strategies for Beginners

    Exchange-traded funds are ideal instruments for beginning traders and investors. Learn the seven best strategies for trading ETFs.
  5. Savings

    Do Natural Gas Prices Always Follow Oil Trends?

    Prices for oil and natural gas are highly correlated. But investors should be aware of different factors affecting the prices of these commodities.
  6. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares JPMorgan USD Emerg Markets Bond

    Learn about the iShares JPMorgan USD Emerging Markets Bond fund, which invests in bonds of sovereign and quasi-sovereign entities from emerging markets.
  8. Active Trading Fundamentals

    How Hedge Funds Front-Run Index Funds to Profit

    Understand what front running is, and learn how hedge funds use this investing strategy to profit from the anticipated stock buys of index funds.
  9. Mutual Funds & ETFs

    ETN Analysis: Rogers Intl Commodity Energy Total Return

    Learn more about the Rogers International Commodity Total Return, which is an exchange-traded note that tracks a broad index of commodity futures.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Large-Cap

    Discover how the Schwab U.S. Large-Cap exchange-traded fund is managed, the index it tracks and the investors for which it is most appropriate.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Benchmark Crude Oil

    Benchmark crude oil is crude oil that serves as a pricing reference, ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!