For some years, retail and institutional investors have faced the unpleasant fact that cash accounts and fixed income opportunities are not going to provide them with the income they need to pay household bills or meet their pension fund commitments.
Indeed, the latest developments in central bank policy are making this task even more difficult.
As a result of the sharp imbalance between the demand for European bonds – led by traders front-running the European Central Bank’s quantitative easing (QE) policy – and more limited supply of bonds, for example Germany running a small fiscal surplus, the yield on European debt has collapsed.
More than €2trn (£1.45trn) of such bonds now have negative yields.
The arbitrage effect is encouraging investors to drag down higher yielding debt from other countries, both corporate and sovereign, in an attempt to find an alternative source of income.
While the self-sustaining growth in the US and UK means that they are edging ever closer to raising interest rates, there is little likelihood they will rise quickly or aggressively.
Politically, all the pressures are for strong employment and wages growth to restore the fortunes of hard-pressed households.
One of the few asset classes that can help investors in this environment is equities.
Two issues to consider are, firstly, the relative yields and, secondly, the ability to fund future dividends.
Since 2009, the dividend yield has easily exceeded the return from cash or short-dated bills – even more so when including share buybacks, which have added about 1 per cent to the yield of US and UK shares.
More recently, a new trend has been that dividend yields regularly exceed those on investment-grade corporate bonds, which have been pulled lower by events in the sovereign world.
The question is, can such yields be sustained?
There are some worries about corporate earnings in the US and the UK due to the pressures from stronger currencies.
However, the reverse is true for companies in Europe, Japan and much of Asia, where currency trends provide a tailwind. In addition, cash levels are at high levels across most companies, while dividend payout ratios are not unduly high.
Targeting global equity income is, therefore, an appealing strategy for many investors.
A favoured approach is to pay less attention to a country overlay but instead to consider the fundamentals on a company-by-company basis – after all, it is corporate cashflow investors are buying into at the end of the day.
Themes such as high dividends, dividend growth and dividend upgrades can all provide good prospects.
If a country approach is needed, then markets with yields above 3 per cent are well worth examining, including developed European large caps, Asian markets, emerging Europe, Latin America and, of course, the UK.
Andrew Milligan is head of global strategy at Standard Life Investments
