Investors willing to look at the bear market meltdown with a “glass half-full” type of an attitude will find that dividends and yields are the juiciest they’ve been in years, even decades.

Double digit capital gains, courtesy of the last multi-decade bear market, pushed dividends in the background. Like a kid that’s become disenchanted with an old toy, investors traded in old fashioned dividend income for high octane growth investing.

All was well, until one day, somebody took the kids new toy away. Capital gains were actually lost in two stages. The first shock happened in 2000 when the tech bubble burst und the tech-laden Nasdaq (Nasdaq: QQQQ) dropped some 40%. Even though technology suffered, other sectors like the Financial Select Sector SPDRs (NYSEArca: XLF) performed quite well.

Capital gains were taken away for good in the period following October 2007. Before a 40% drop, the Dow Jones (AMEX: DIA) and S&P 500 (AMEX: SPY) reached never before seen highs. At such lofty heights, dividends were a moot point to most investors.

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In fact, at that time, dividend yields had recorded all-time lows. As prices for many stocks were cut in half, dividend yields for most stocks and ETFs doubled. At first glance, it seems like high yielding ETFs selling at a discount of 30, 40, 50 or 60% might be a good buy (more about that later).

Double digit yield ETFs

The iShares FTSE NAREIT Retail ETF (NYSEArca: RTL) lost nearly half of its value in 2008 and comes with a sweet yield of 13.62%. Having lost only 28% in 2008, PowerShares’ Financial Preferred Portfolio (NYSEArca: PGF) comes with a 13.58% yield and dwarfs the iShares S&P US Preferred Stock ETF’s (NYSEArca: PFF) modest yield of 10.77%.

The fact that double digit yields come from the worst performing sectors (financials and real estate) raises red flags for the astute investor. However, if you are willing to settle for great yields rather than shooting for the stars, you will find some attractive options (the February and 12-18-08 issue of the ETF Profit Strategy Newsletter contain a list of the highest paying dividend ETFs).

Best of class dividend ETFs

Before we venture into equities, let’s take a look at corporate and municipal bonds. Investors looking for absolute safety may have overlooked the 10.56% yield of the iShares iBoxx High Yield Corporate Bond ETF (NYSEArca: HYG) or the partially tax-free 5% yield of the PowerShares Insured National Municipal Bond Portfolio (NYSEArca:  PZA).

Of course you can’t discuss dividend investing without mentioning the iShares DJ Select Dividend ETF (NYSEArca: DVY). DVY has established a track record since 2003 and pays 6.94%. State Street’s S&P Dividend ETF (NYSEArca: SDY) comes with less exposure to financials (17% compared to DVY’s 25%) and therefore a slightly lower yield, 6.27%.

Even low-cost value alternatives like the SPDR DJ Wilshire Large Cap Fund (NYSEArca: ELV) and iShares Russell 1000 Value ETF (NYSEArca: IWD) sweeten the deal with dividend yields in the 4 to 5% range.

Even though dividend yields are tempting, ask yourself this before you buy the next yield hog: Would you have bought any of the above mentioned ETFs a year ago knowing that the market will drop 30% and more? Is the cash incentive (yields) worth the risk of another 20% drop?

Even though unpopular at times, we’ve been telling our subscribers to stay away from dividend and equity ETFs (with the exception of a brief period following the November 2008 lows).

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Rather than focusing on the cash benefit of dividends, we’ve used dividends as an indicator. All-time dividend yield lows in 1999 signaled that a top in equities was imminent. Just like the ominous canary in the mine, dividend yields are a trusted indicator of market tops and bottoms.

The "Four Horsemen"

A look at historical yields shows that all major stock market bottoms (1932, 1948, 1953, 1975, 1982) have a certain dividend yield in common. The simple lesson is: the market continues to fall until this yield level is attained.

The brand-new March issue of the ETF Profit Strategy Newsletter analyzes historical dividend yields in conjunction with three other benchmark indicators: P/E Ratios, investor sentiment and the Dow measured in gold. All four indicators point in the same direction. In fact, indicative of the implications we call them the “Four Horsemen”. Don’t allow yourself to be wrong-footed, let the Four Horsemen take the guesswork out of investing.

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