Beating the Dividend Income Drought

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Will dividend yields test 1999 lows? That was the title of my post from a few weeks ago in which I explained to readers how the dividend income drought facing investors continues into 2014.

Interestingly, the Federal Reserve’s initiation of ZIRP (zero interest rate policy) on Dec. 16, 2008 wasn’t the beginning of the bear market in dividend yields as some commentators have suggested. Rather, the bear market in depressed yields is a three-decade long trend that began in the early 1980s when the S&P 500’s yield peaked at 5.57% and has been down ever since.

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Observing the trend of decelerating S&P 500 dividends (NYSEARCA:SDY), FactSet wrote:

“Analysts’ estimates for forward twelve-month dividend per share (“DPS”) growth have slowed for six consecutive quarters. The current, forward twelve-month DPS growth estimate (+8.7%) is the lowest projection since Q3 2010—a period when trailing DPS growth was negative—and the estimate for growth in 2014 is even lower at 8.5%.”

The rule of 72, which tells us how long it takes for money to double, gives us another historical perspective on today’s depressed equity yields (NYSEARCA:VYM).

SP500 FactSet Dividend Yield

In 1981, when the S&P’s dividend yield was around 5.5%, it took just 12.9 years for an income investor to double their money. Today, with the S&P 500’s current yield of around 1.88%, it would take an income investor three-times as long or 38.3 years to double their money!

To combat the extreme conditions of today’s depressed yield environment, it’s imperative for today’s dividend investor to be savvier about their approach. What worked before doesn’t necessarily work today and having a total income approach that stretches beyond traditional income sources is a must. People must not live on dividends from stocks (NYSEARCA:PEY) and income from bonds (NYSEARCA:BOND) alone!

The covered call strategy is one example of a high income strategy we’ve talked about.

While equity dividend yields (NYSEARCA:DLN) have trended down, our Income Mix Portfolio has generated $20, 945 of high income since its Feb. 2012 debut. The Income Mix ETF Portfolio at ETFguide consists of a $100,000 portfolio that sells monthly covered calls on a basket of low cost ETFs. Each month, we tell readers the exact ticker symbols, expirations, and strike prices we’re selling.

Our April 2014 income trade generated $758 of monthly income and assuming the latest income figures continue in future months, the annualized yield rate works out to around 9%.

Combining the income generated from monthly covered calls along with dividends is definitely a powerful arsenal. The correct answer for today’s extreme rate environment is an extreme solution with teeth.

While the covered call strategy isn’t suited for growth investors, it’s still a highly effective strategy that more investors with high income as their main goal should be using.

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  1. Jay says:

    Thank you for the follow up article about covered calls. I find it works best with stable stocks and ETF’s even though the premiums are lower.

    The more volatile the stock/ETF the more likely it is to disappoint a covered call writer. The mistake many call writers make is buy/write the highest Beta stocks to “capture” the largest premiums.

    I just try to make four yards forward and a pile of dust each play! – jay

    • David says:

      Jay’s got it exactly right. Look at total return, slow but relatively stable. Write calls on a conservative dividend portfolio.

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