Beating The Dividend Income Drought

by: ETFguide

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.

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 (NASDAQ:PEY) and income from bonds (NYSEARCA:BOND) alone!

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