Income investments have reaped their share of the spoils. Utility stocks continue to push out to all-time highs. Limited partnerships are ticking higher. Real estate investment trusts (REITs) are soaring ever higher. The benchmark 10-year Treasury note yield is in the middle of its range of recent years but the bond market is generally healthy.

Of course, not every income-producing sector has participated.

Canadian royalty and income trusts were slammed following Conservative Party Finance Minister Jim Flaherty’s wholly unexpected announcement he was changing the taxation rules.

For the most part, however, diversified income portfolios are doing well. As I’ve said, the best strategy for income investors is to build a portfolio of high-quality securities from a wide range of sectors.

To get income, you’ve got to hold positions long enough to collect dividends and interest, not to mention to avoid taxation penalties for not holding at least 90 days. High quality is the best protection against taking an unexpected hit with an individual selection. Owning income producers from a broad mix of sectors is the only way to dodge those occasional bolts from the blue that hit a particular group of stocks. Strong performance in the undamaged sectors will almost always compensate for the weakness.

We saw that principle most clearly demonstrated in the late, great bear market of 2000-02. Battered by the bankruptcies of Enron and WorldCom, falling product prices and dysfunctional deregulation and a mountain of debt, the Dow Jones Utility Average sank 59 percent from its high in late 2000 to its ultimate low in late 2002. And several former high flyers did quite a bit worse.

US REITs, however, had one of their best performance periods on record. Meanwhile, as interest rates began to fall in 2001, the bond market also scored. So did other fixed income plays not caught up in the utility wreck. The result: positive performance for diversified income portfolios, despite the spectacular crackup of one of the most popular dividend-paying sectors.

That’s all worth noting in the wake of the most recent meltdown of a popular income-paying sector, Canadian royalty and income trusts.

These securities have been gaining popularity over the past several years thanks to huge yields. Under Canadian tax law, trusts are able to pay dividends from pre-tax cash flow rather than post-tax earnings, as is the case with corporations.

The most popular group by far has been the oil and gas royalty trust sector, which combines high yields with a play on what’s been a red-hot energy sector. Rising energy prices have pushed up oil and gas producer trusts’ distributions sharply over the past few years, and prices have followed suit with massive gains.

All this came crashing down after Mr. Flaherty’s Halloween night announcement that he would begin taxing existing trusts essentially as ordinary corporations beginning in 2011. He also stated any companies converting to trusts after his announcement would be taxed as corporations immediately, essentially eliminating any impetus to convert.

Flaherty’s moves came just weeks after statements from his office praising trusts. And they’re a 180 degree flip-flop from Conservative Party promises to leave trusts alone during the run-up to the election last January.

Flaherty’s stated motives are to preserve government revenues from corporate taxation. With telecom giants like BCE (NYSE: BCE) and TELUS (NYSE: TU) announcing plans to convert to trusts--and ENCANA (NYSE: ECA) apparently close to doing so--some estimated the government would lose $500 million in tax leakage, potentially threatening social programs.

To some, Flaherty is a courageous hero, standing up to trusts and the millions of Canadians who invest in them for the benefit of the nation’s financial future. Unfortunately, without the capital inflows from trust investment, the nation is already considerably poorer. In fact, more than $30 billion in wealth has been wiped out.

Investors in Canadian trusts have taken some hits over the past week. For those who’ve been in them a while, the pullback represents the unwinding of profits rolled up in recent years. For relative newcomers, it’s a pool of red ink.

The question now, however, is not where anyone really stands in this market in terms of profit and loss. Rather, it’s whether it makes sense to keep positions in this sector, or to exit for greener pastures.

The only thing that makes sense is to stick with the strategy of owning high-quality securities from a broad range of sectors. Those with big losses in a particular trust who can use the tax writeoff may want to do so. Those who were caught yield chasing and now own trust weaklings may also want to bail. And those who were overloaded on the sector have, unfortunately, now seen why that’s never a good idea, no matter how appealing a particular group looks.

Leaving Canadian trusts entirely, however, is also violating the diversification strategy. For one thing, there are many trust-like investments that are not affected by the tax moves. These include Canadian REITs (which are still much higher yielding than their US counterparts), power trusts and “straddle” shares that combine debt with equity.

Second, one of the reasons we diversify is we don’t know in advance which group is going to outperform, and which will get hit in the coming months. In fact, more often than not, it’s the groups that are beaten up in one quarter that do the best the next. If you abandon a sector right after it takes a hit, you may avoid some worry. But you’re also going to miss out on the recovery. Meanwhile, chances are you’re going to load up on another group that’s been performing better, but may be due for its own pullback.

As for the Canadian trusts themselves, there’s clearly more uncertainty ahead. The government, for example, is considering restricting acquisitions by trusts to deals that won’t increase share counts by more than 15 percent. That will squash small oil and gas trusts that depend on acquisitions to offset the ongoing depletion of their fields.

Also, if oil and natural gas prices should sink further, cash flows for producer trusts will slip even before their fields run dry. That means the steady stream of dividend cuts from weaker trusts will continue. This week, for example, ADVANTAGE ENERGY (TSX: AVN.UN, NYSE: AAV) cut its dividend yet again, as a history of massive share issues to fund expensive acquisitions continues to catch up with it.

But there’s also quite a lot of reason to expect a rebound, and not just in the trusts that aren’t affected by the taxation moves.

First, trusts across the board are already pricing in higher taxation and a lot more. Good ones still have a lot of room to grow.

Oil and gas are still very much in a long-run bull market. As long as there’s little conservation, little use of alternative energies, no major discoveries of conventional reserves and no crushing global recession--the factors that ended the 1970s energy bull market--oil and gas prices will remain in a robust market.

That means added value for the oil and gas trusts that can stay healthy in the current turmoil. My short list: ARC ENERGY (TSX:AET.UN, OTC: AETUF), ENERPLUS (TSX: ERF.UN, NYSE: ERF), PENN WEST (TSX: PWT.UN, NYSE: PWE) and VERMILION ENERGY (TSX: VET.UN, OTC:VETMF).

Finally, four years is a very long time in politics. As a result, it’s still quite possible the Conservatives’ tax proposals on trusts will be overturned. According to recent national polls, the ruling Conservative party has already squandered its post-election goodwill with the Canadian electorate. In fact, outside of Alberta, the Liberals--who voted unanimously against the Conservatives’ proposal this month to change trust taxation--are now ahead in every province. And as the crushing of trusts starts to impact the Alberta economy, even that support is likely to come under pressure.

No one can make any guarantees about what will eventually happen to Canadian trusts. But there are more than enough reasons to keep the strongest of them as part of a diversified income portfolio.

Here’s a brief look at other major income investing sectors, and their outlook over the next 12 to 18 months:

UTILITIES: As I pointed out last week, elections are always important to this still heavily regulated group. Fortunately, most emerged from the recent voting in good shape. SIERRA PACIFIC RESOURCES (NYSE: SRP), for example, has won passage of its long-term investment plans in Nevada, as that state’s regulatory climate remained favorable. The only exceptions are in Illinois, where an extension of the rate freeze is gaining traction. That’s a reason to dodge AMEREN (NYSE: AEE). Otherwise, as third quarter earnings made clear, the group is in good shape. The only fly in the ointment is valuations, which are high and rising. But for those with investments in the sector’s best already, there aren’t many worries.

REITs: Price is also the biggest problem with this group as it continues to run higher. The residential REITs are still somewhat attractive in terms of yield, and as the environment for rents improves. The best buys are in Canada, whose REITs are unaffected by proposed tax changes but which yield 2 percentage points more than US REITs of equivalent risk. Most commercial REITs, including all those yielding less than 3 percent, should be sold.

BONDS: The benchmark 10-year Treasury note remains in the mid-point of its 52-week range. With inflation figures moderating, yields are likely to drop and bond prices rise in the coming months. The Federal Reserve for its part is publicly in an inflation-fighting mode, which is also calming for the market. The best ideas are still securities of companies with improving credit ratings, more than a few of which can be found in the utility sector. Some of my favorite comeback companies are CMS ENERGY (NYSE: CMS) and Sierra Pacific Resources.

RURAL TELECOMS: These remain among the best-kept secrets on Wall Street. Third quarter cash flows were again robust, as companies’

new services in broadband and sometimes wireless more than offset the steady decline of ordinary phone connections. Cash flow was further augmented by cost cutting and debt reduction.

BIG TELECOMS: These are also little understood, as Wall Street continues to focus on the loss of local phone lines rather than the robust growth of businesses that are pushing up overall results.

There’s also a misperception that Congressional Democrats will make trouble for the likes of AT&T (NYSE: T) and VERIZON (NYSE: VZ), but Big Tel definitely has plenty of supporters on both sides of the aisle. Take advantage of price dips to buy both, as well as the rural telecoms.

BIG OILS: Does anyone need further confirmation of how steady this group is? True, yields aren’t huge, but with credit ratings of AA and up, payout ratios of 30 percent and lower and piles upon piles of cash--not to mention a hammerlock on the markets for the world’s most essential commodity this side of water--it’s hard to imagine a scenario in which the world’s biggest oil companies don’t thrive.

The group was a major winner in the recent elections, as voters in Alaska and California refused to sock them with higher taxes. Some Democrats may want to take action in Congress. But the presidential veto and 49 Republicans--not to mention many Democrats--are pretty tough hurdles to overcome.

TANKERS: This group ran up sharply last year and then plunged, in large part due to a lack of understanding about their basic businesses. Today, however, the strongest, like General Maritime (NYSE: GMR), yield nearly 8 percent and trade well below their highs. If you buy this group, think about holding for at least a year. Dividends are seasonal and flow with the traffic on the high seas. Only by sticking through the seasons are you assured of really getting a year’s worth of cash flow.

Above all, don’t over-commit to any one of these sectors. All are solid and there are great companies in them. But none are immune from unexpected setbacks. The only way you do that is by diversifying among all of them.