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Don't Let Low Rates Beat Up Your Income Strategy


November 22, 2013
Ron DeLegge, Editor

Never mind that interest rates have been on the rise. It hasnít helped income oriented investors much, because millions of retirees and dividend focused individuals still arenít generating adequate income from their investments.

As U.S. stocks march ahead into nosebleed territory, the 12-month dividend per share yield on the S&P 500 (NYSEARCA:IVV) is just 1.91%. Thatís a far cry from the 5.22% dividend peak for the S&P back in January 1978.  

What about Treasury bonds?

The 10-year Treasury yield (^TNX) trades near 2.75% and will give you almost 1% more in yield than the S&P 500ís current yield. But even at that depressed yield, it would take an investor 26 years to double their money. Think about it this way; if youíre 40 years old, youíll have to wait until age 66 to double your cash. Can you wait that long?

We know that investment income has been clobbered by low interest rates, but even household income is down significantly.

The median American household made just $51,017 last year (See chart below) compared to $51,720 in 1996. That means the typical middle class family earned more money 16 years ago than it does today!

Hasnít the Federal Reserveís QE made the economic climate better?

The answer is ďnoĒ as measured by household income. Since 2008 Ė when the Fed began ramping up QE stimulus - median incomes are down around 5%. Cleary, the hot money from QE hasnít benefited the broader economy or middle class in a meaningful way.

Adding Fire Power
Aside from investing money in higher dividend yielding sectors like utilities (NYSEARCA:XLU), MLPs (NYSEARCA:AMJ) or REITs (NYSEARCA:VNQ), selling covered call options on a portfolio is another way to increase monthly cash flow.

This is exactly what our ETF Income Mix Portfolio does. Each month we sell covered calls on ETFs that track major investment categories.

By using this technique, not only are we able to collect dividends (NYSEARCA:DVY) from the underlying ETFs, but we also generate income from the options.

Today's extremely distorted interest rate marketplace requires an extreme response. That means adding high octane income strategies like selling covered calls along side traditional income strategies of buying dividend assets.

Over the past year, our Income Mix Portfolio has generated around $10,400 or $866 per month, based upon a $100,000 all-ETF portfolio. Each month we tell readers the best combination of ETF covered call options to sell.

Although selling covered calls puts a collar or limit on any potential capital gains, the monthly cash flow we get helps us to achieve our primary investment objective: More income with less risk.

The ETF Profit Strategy Newsletter uses technical, fundamental, and sentiment analysis along with market history and common sense to keep investors on the right side of the market. Since the beginning of the year, 74% of our weekly ETF picks have been winners. (through Q3 2013)

Follow us on Twittter @ ETFguide 

P.S. To learn more about the basics of selling covered calls, check out the Options Industry Council's outstanding online courses.

CommentsAdd Comment

GHubbert said on November 26, 2013
  Very interesting how median incomes are back to 1995-1996 thresholds. The job market is still too soft and I have friends that have been converted into permanent part-timers. Investment income isn't something they thought they would need this soon in their career path.
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