George Ross Goobey, an actuary and investment manager for the Imperial Tobacco pension fund was one of the first investment managers to invest in equities rather than bonds. His rationale was that, over time, dividend income from a well-chosen basket of shares would grow and exceed the flat yield from government bonds. Capital appreciation in the underlying shares was simply a bonus that was not part of the rationale, but as more people converted to the income argument and bought shares, share prices went up and yields went down, leading to the crossover of equity and bond yields.

This crossover between equity and bond yields proved excellent in 2003 to highlight a great buying opportunity for equities after the technology crash and in 2009 as the Financial Crisis neared its end. Now it is normal for equities to yield more than government bonds. Currently, global equities yield 2.6% compared to the Citi World Government Bond Index yield of just 0.8%.

A key factor about the global dividend yield is that it is much less volatile than global earnings.   Since February 2015, global earnings have fallen 11% while dividends have risen by 5%. Equities now yield more than government bonds in all major developed markets. With aggressive monetary policy driving interest rates down to almost zero, global equities have turned into a yield asset and dividend-paying equities look attractive for income-searching investors.

However, dividends are paid out of earnings and as global earnings have fallen by 11% over the past year and global dividends have risen by about 5%, this is a not sustainable trend.

Simply investing in an index of income-yielding stocks may not be a sustainable solution for conservative income generation. Companies need to have sustainable and increasing dividends. This means an acceptable ‘margin of safety’ not only in financial strength but also the reliability of their future earnings stream and financial ability to keep paying attractive dividends.

The current favourite sectors for sustainable dividends are Consumer Staples, Healthcare and Industrials. The sectors to avoid are Energy, Materials/Mining, and Telecoms.