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Beating Low Yields in a Low Rate Envirnoment


October 29, 2013
Ron DeLegge, Editor

Earlier this year, we showed our readers a 50-year chart of the S&P 500 dividend yield. (See below) That's when the S&P's dividend yield was around 2.07%, but it has since slumped to around 1.88%, based upon estimated 12-month dividends as reported by Standard & Poors. How does that compare to recent history? Why is this a problem for income investors?

In early 2009, the S&P 500 (^GSPC) carried a dividend yield near 3.24%. The U.S. stock market (NYSEARCA:SPY) has since soared by more than 90%, carrying the S&P 500 above 1,700. Put another way, the S&P 500s dividend yield today is almost half what it was four years ago!

Although existing equity owners (NYSEARCA:SCHB) have been rewarded with gains, for new equity buyers, higher stock prices have come at a serious cost; lower yields. This is especially true for retirees and yield focused investors who rely on a steady income stream (NYSEARCA:DVY).

Building a long-term fortune through income investing in both up and down markets involves two simple steps:

1) Producing a sustainable income, and;
2) Protecting your principal.

Beating today's low yield environment requires a high octane approach. And for several years now, weve advocated a two-pronged arsenal of both traditional dividend income and premium income from covered call options.

Over the past year, our ETF Income Mix Portfolio, which employs this approach, has yielded 10.7% using a combination of dividend income and selling covered calls. In summary, successfully combating today's extreme interest rate environment requires an extreme response.

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CommentsAdd Comment

LavinRR said on November 05, 2013
  Chancellor good point. Here's another thing to think about: When stock prices correct, and they will, dividend yields should rise and if yields go up enough it might even make stocks attractive again from an income generation perspective.
Chancellor said on October 29, 2013
  Next question: Will the S&P, at its current trajectory, make a run at the all time 1999 dividend yield low?
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