Will Dividend Yields Test '99 Lows?

by: ETFguide

The past six years have been brutal for dividend and income investors. Zero percent interest rates have depressed bond yields (NYSEARCA:BOND) and with major stock indexes (NYSEARCA:DIA) now trading at all-time highs, dividend yields relative to prices have fallen too.

Last year, the number of S&P 500 (NYSEARCA:SPY) stocks paying a dividend touched a 17-year high (417 or 84% of index components). Also, the number of companies increasing year-over-year dividend distributions (NYSEARCA:SDY) matched mid-1990s levels (329 or 66% of index components). If the percentage of S&P companies are increasing dividends, what's the problem?

None of this changes the fact that S&P dividend yields have been mired in a three-decade long bear market.

After peaking at 5.57% in 1981, dividend yields bottomed at 1.14% in 1999 and are on pace to challenge record lows once again. Put another way, today's S&P 500 yield is 67% lower compared to the early 1980s!

To combat the extreme conditions of today's depressed yield environment, it's up to the income investor to employ proven strategies that reach outside the bounds of traditional income sources that dividends from stocks (NYSEARCA:DVY) and income from bonds (NYSEARCA:PFF) offer. And the covered call strategy fits the bill.

Over the past two decades, the CBOE S&P 500 BuyWrite Index (NYSEARCA:BWV) has virtually matched the returns of the S&P 500, but with better risk-adjusted returns and a better yield.

The Buy Write strategy involves buying a stock or basket of stocks and selling covered calls that correspond to the stock or basket of stocks. Although some Buy Write strategies underperformed from 1995-98 when the S&P 500 rose more than 20%, consistent cash flow via premiums from the sale of covered calls also provided a portfolio hedge during subsequent market corrections.

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