During the booming stock market conditions of the late 1990s, many investors and analysts downgraded the importance of dividend income. Indeed, a growing tendency by companies, especially in the US, to set up regular share buy-backs of their own stock was seen by many to offer an alternative to dividend payments.
Share buy-backs were seen as a more tax-efficient mechanism of returning money to shareholders, given that tax rates on capital gains are lower than tax rates on dividend income. Booming share prices meant that many market participants focused on the capital appreciation element of equity returns and downgraded or even ignored dividend income.
However, this attitude ignores the fact that, historically, dividends have formed a very important part of total long-term returns on equity investments. Research shows that, over the past 100 years or so, dividend income has accounted for about 50 per cent of the total return from US equities.
In contrast, during the 1995-2000 period, dividends accounted for just 20 per cent of the total return from US equities.
As well as forming a very significant portion of overall return, dividends provide a stable and growing source of return. The Barclays Equity-Gilt Study provides long-run return data for Britain's securities markets. This shows that dividend income is far more stable than share prices.
For example, since the second World War dividend income has fallen on eight occasions compared with 19 occasions when share prices declined.
Since the early 1980s there has been a steady downward trend in the dividend yield. The accompanying table shows the percentage dividend yield for the major markets based on the FTA-World series of indices. This shows that in Europe, dividend yields average 2.5 per cent, whilst the comparable US figure is 1.5 per cent.
The dividend yield in Japan is less than 1 per cent but, compared with interest rates on yen bank deposits of close to zero, this is not too surprising.
The yield of 1.8 per cent on the Irish market is somewhat below the European average of 2.5 per cent.
The dividend yield on all stock markets has risen this year after several years of decline. Unfortunately for investors, this rise is almost entirely due to the falls in share prices rather than a large increase in dividend payments. In fact, the economic slowdown is leading some companies to cut their dividend payments.
By long-run historical standards, current dividend yields are still relatively low. However, when compared with current low and declining interest rates, the yield on equity markets begins to look quite attractive.
Data over long periods show that dividends grow in tandem with the growth in cash flow and profits. With corporate profits under severe pressure, dividend payouts are likely to grow slowly for a number of years.
This is probably a best-case scenario and, if the global economy remains in recession for longer than current expectations, a decline in the overall level of dividend income could well be a prospect.
In this environment, those companies with long-established records of uninterrupted dividend growth are likely to become increasingly popular with investors.
