Beating Low Yields in a Low Rate Envirnoment


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 & Poor's. 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 500's dividend yield today is almost half what it was four years ago!

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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, we've 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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