During the great bull market of the 1990s, many investors lost sight of dividends, blinded as they were by capital gains

During the bull market of the late 1990s, capital growth seemed to be the only characteristic that investors looked for in company shares. With many stock market indices regularly producing annual capital returns in excess of 20 per cent, it is not surprising that dividends were often overlooked.

In a week when many of the world's major stock market indices fell to five-year lows, the income or dividend paid out by company shares is coming back on to the radar screen of most investors. Most studies of the long-term returns from equity investing show that dividends have, in fact, been a very important part of the overall returns generated from stock markets.

In fact, over many periods, dividends accounted for a larger portion of the total return than capital gains did. It is perhaps not too surprising that this fact was lost in the midst of the euphoria that gripped investors during the great 1990s bull market.

With equity markets continuing to slide and to trade in a volatile fashion, dividends at least offer the prospect of some stability. Most companies are loath to cut their dividend payments and, even in lean times, the majority of companies will pay modest increases.

The dividend yield is defined as the dividend payment per share divided by the share price expressed as a percentage. Therefore, if share prices fall sharply, as they have so far this year, the dividend yield will rise.

The accompanying table shows the dividend yield now available for global stock markets. The global average dividend yield is now 2.1 per cent, ranging from a high of 3.4 per cent in Britain to a low of 0.9 per cent in Japan. At a time when inflation is dormant and short-term interest rates are low, dividend yields seem reasonably attractive. For example, the yield of 1.8 per cent in North American markets compares with US short-term interest rates of 1.75 per cent.

Of course, these broad averages conceal the enormous diversity that exists among the constituents that make up the indices. For example, 25 per cent of companies in the FTSE 100 index now have a dividend yield that is over 5 per cent. The situation regarding the FTSE Eurotop 300 index, which includes Europe's largest companies by market capitalisation, is that 15 per cent of its constituents offer a dividend yield of over 5 per cent. In an environment of very low interest rates, investing in high-yielding equities has attractions.

However, there are several pitfalls that investors need to watch out for. Most importantly, on closer inspection, many high- yielding equities have announced, or are about to announce, cuts in their dividend payout. In these cases, the high dividend yield is clearly more apparent than real.

There are now several stocks in the telecoms, media and technology (TMT) sectors such as France Telecom and Vivendi Universal that offer very high dividend yields. However, these companies have extremely weak balance sheets and many of them are facing a liquidity crisis. Therefore, most of the high-yielding stocks in the TMT sectors would probably be best avoided.

Dividend yields across the financial sector are now high and well above 5 per cent in several cases. For example, Abbey National in Britain now offers a dividend yield of close to 7 per cent. Worries about the insurance subsidiaries of banks partly explain these high yields. In contrast to the TMT stocks, the balance sheets of many financial stocks are quite strong and therefore most of these companies should be able to at least maintain their dividend payout.

Dividends paid by Irish quoted companies are not particularly high and are in general somewhat lower than British yields. Nevertheless, the recent decline in share prices means that some shares now look attractive on a yield basis.

The Northern Ireland Electricity generator, Viridian Group, now has a dividend yield of 6.8 per cent and IWP International yields 6.1 per cent. Waterford Wedgwood produces a yield of 5.5 per cent while, in the food sector, Greencore yields 4.4 per cent and the tiny Donegal Creameries yields 5.1 per cent.

While the financial stocks are now trading on an above-average yield, no Irish financial stock offers a yield of over 4 per cent. Of the large financials, AIB offers the highest yield of 3.7 per cent. This reflects the fact that the Irish financial stocks are heavily dependent on the growing Irish economy. Also, those Irish stocks with a large exposure to insurance-related investment products, such as Irish Life & Permanent, have very little exposure to problem areas such as with-profit endowments.

Overall, investing in high- yielding stocks does have attractions in the current environment but careful analysis of the underlying financial position of the target companies is essential. Ultimately, only those companies that thrive and prosper will have the capacity to continue to pay and grow their dividend payments.