Inflation is rising and proving to be more persistent than originally expected. That’s denting some income-generating assets, namely fixed income instruments.

Fortunately, there are alternatives to turn to. Investors just need to think outside the box. For example, midstream energy equities, including master limited partnerships (MLPs), have impressive inflation-fighting capabilities. Those credentials could make the ALPS Alerian MLP ETF (NYSEArca: AMLP) worth considering as consumer prices trend higher.

“Recent inflationary pressures have been attributed to several lingering effects of the COVID-19 pandemic,” says Alerian analyst Roxanna Islam. “Consumers shifted to buying goods over services, and demand for certain goods like home appliances and electronics increased significantly. Inventories were stretched thin, and supply chains were stressed as they were expected to move more goods on irregular routes. As a result, input costs rose including transportation costs and materials (e.g., copper, steel, semiconductors.”

This year, energy assets are proving to be positively correlated to inflation. Energy is the best-performing sector in the S&P 500, and AMLP, the largest MLP exchange traded fund, is higher by 38.19%.

As experienced investors know, inflation is pesky, and the more persistent it is, the more negative it is. Rising consumer prices diminish purchasing power and can weigh on equity performance. Rising inflation also diminishes the allure of bonds, but dividends are one avenue for combating inflation.

“While dividends are not a perfect inflation hedge, dividend payments are generally less volatile than earnings for several reasons,” adds Alerian’s Islam. “As mentioned earlier, those companies with strong pricing power can more effectively pass cost increases to customers and can maintain or even grow dividends during periods of high inflation. Even those companies that experience short-term earnings weakness due to inflation may still maintain their dividend payments to shareholders.”

In inflationary climates, what income investors should emphasize is dividend growth. Fortunately, that outlook is improving dramatically in the midstream energy space. While some payouts in the group were cut in the early stages of the coronavirus pandemic as operators looked to conserve cash, midstream companies renewed their focuses on reining in spending, improving balance sheets, and boosting free cash flow — all signals that they can support and perhaps grow dividends. Those moves are paying off as several AMLP member firms raised dividends over the past 12 months.

Other funds with exposure to income-generating energy assets include the VanEck Vectors Energy Income ETF (EINC) and the Global X MLP ETF (NYSEArca: MLPA).

For more news, information, and strategy, visit the Energy Infrastructure Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.