In 2007, Jerry Seinfeld was TV’s second biggest earner with an income of $60 million. Today, royalties from the TV hit “Seinfeld” accounts for most of his paycheck. Not bad for a show that ceased production 12 years ago.

Even though many enjoy watching Seinfeld re-runs, only a select few have the luxury of depositing royalty checks on a regular basis. Investments with a focus on generating a steady income flow are the default option for many.

Income Producing Sectors

Certain sectors are known to produce steady and reliable income. Even though this has changed over the past year or two, we’ll take a look at a few.

The utility sector, as tracked by the Utility Select Sector SPDR (NYSEArca: XLU), is packed with “widow and orphan” stocks and viewed as a default option by many. XLU’s current yield of 4.51% is respectable and higher than the yields offered by the iShares Barclays 20+ Year Treasury Bond Fund (NYSEArca: TLT).

As of late, many have followed the allure of high yield bond ETFs such as SPDR Barclays Capital High Yield Bond (NYSEArca: JNK), or iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG) which yield 13.25% and 10.52%, respectively.

Just a few months ago double digit yields could also be found in the financial and real estate sectors. At one point, the Financial Select Sector SPDRs (NYSEArca: XLF) paid nearly 10%.

At that time, however (March 2009), most investors weren’t willing to touch the financial sector DESPITE juicy yields. The downside risk seemed to outweigh the cushion provided by yields.

Contrary to the investment sentiment at the time, the ETF Profit Strategy Newsletter actually recommended financial and dividend ETFs via its March 2nd Trend Change Alert: “Dividend ETFs with a higher allocation to financials are likely to rise higher than the broad market.”

At a time when most investors were busy selling, the ETF Profit Strategy actually recommended buying. Why?: “This counter trend rally will have to be broad and powerful (30-40%) in order to relieve investor's pent-up urge to buy.” As it turns out, the financial sector more than doubled from its March lows. This was compounded by generous yields.

The investment world is a fast paced environment and much has changed since the March lows. The appetite for stocks has been rekindled. In fact, a look at the chart of the three major US indexes shows that investors have thrown fear over board. The riskier Nasdaq (Nasdaq: ^IXIC) has outperformed the more conservative Dow Jones (DJI: ^DJI) and S&P 500 (SNP: ^GSPC).

A Big Red Flag

Bull markets climb a wall of worry. The outperformance of the higher beta Nasdaq shows that hope – not worry – is the predominant emotion driving investment decisions. History teaches us that hope has never been the foundation of a new bull market. The only logical conclusion is that the bear market is not yet over.

A multitude of technical, fundamental, and economical factors and indicators are pointing towards an extended bear market with significantly lower prices ahead.

If you only scratch the surface, you can see Wall Street “resting on their (the worst is over) laurels.” If you dig beneath the surface, you will find that real estate prices are not recovering and homes are not selling. A recent report showed that borrowers with once good credit now account for the largest percentage of forecloses. Jobs are still being lost.

Asking the Tough Questions

How can the banks’ toxic assets recover if real estate prices are still falling? How can real estate prices rise when even prime-mortgages are defaulting? How can consumers pay their mortgages if jobs are being lost?

More importantly, the stock market itself is signaling that it’s still sick. Prior stock market bottoms have only been reached after P/E ratios fell below a certain level and dividend yields rose above a certain level. Similar to a thermometer which measures the body’s temperature, those indicators measure the market’s health. The result? Stocks are still overvalued.

Avoid Misleading “Incentives”

We all like to receive cash back, or cash bonuses. Dividends are one version of a cash incentive. But ask yourself this: Would you buy a new car that sells for $10,000 above fair market value just to get $3,000 cash back?

The stocks most investors are relying on to provide a steady income are trading above fair market value. For that very reason, stock prices will soon disappoint investors.

If you own the iShares Dow Jones Select Dividend ETF (NYSEArca: DVY), you have a 15% exposure to financials and a 27% exposure to utilities. You are probably aware that financial stocks lost 80% from their 2007 top to their 2009 bottom. But, did you know that utilities – the widow and orphan stocks - lost nearly 50%? The S&P 500 (NYSEArca: SPY) did not fare much better.

Is bond income any safer? Consider the following: When a company gets in trouble, its debt obligations such as bonds and stocks lose value. True, GM bond holders fared better then GM stock holders, but that’s little comfort to bond holders who got to keep a mere 23 cents on the dollar.

Last September, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD), a basket of highly rated corporate bonds, lost 20% within seven days. This was not a flash in the pan. This was only a preview of what lies ahead.

If you think municipal bond income is safe, consider the following: The state of California has started to issue IOUs instead of cash payments. If California, one of the most prosperous states in the country can’t afford to pay its bills, do you think your muni bonds are safe?

New Ways to Generate Income

After evaluating your holdings, you may find that the risk of continuing to own your stocks, funds and ETFs will outweigh any income you hope to receive over the next years. Therefore, how can you replace your income?

My mother in law once told me: “You can’t stop the waves, but you can learn how to surf.”

You can’t prevent stock prices from declining, but you can learn how to profit in a bear market and how to draw income from a portfolio constructed to withstand declining prices.

Holding on to declining funds simply because they produce income, is like charging up your credit card for the sole purpose of getting rebate points. Yes, it’s nice to get that rebate check or travel miles, but at what financial cost?

The only reason you should want to own a fund is for capital appreciation. As long as your portfolio appreciates you will be able to draw income, although it may come in the form of withdrawals. Once again, income producing funds are no good if your principal deteriorates.

Since its inception, the ETF Profit Strategy Newsletter has focused on identifying low risk, high probability profit opportunities to grow your portfolios. Such opportunities included the January market top above Dow 9,000 and the March market lows below Dow 6,700.

Recommended short ETFs, such as the UltraShort Financial ProShares (NYSEArca: SKF), more than doubled between January and March, while leveraged ETFs such as the Ultra Financials ProShares (NYSEArca: UYG) have gained 150% and more, since the March Trend Change Alert. That type of portfolio growth generates income without principal decay.

The most recent issue of the ETF Profit Strategy Newsletter includes a short, mid and long-term outlook for the US stock market.  It also presents target levels for the top of this rally, the ultimate market bottom, and corresponding ETF profit strategies.

This strategy may not generate the type of royalty income Jerry Seinfeld enjoys, but it can surely provide peace of mind.