From the 1960s to the 2000s investors became used to a ‘reverse yield gap’, where the interest received from bonds was higher than the dividend yield from equities.
This was initially unexpected, since equities are riskier and so should offer a higher yield to compensate. This was their attraction in the distant past when debt was the norm and publicly traded equities were the alternative assets of the time.
Having become mainstream, the second half of the 20th century saw a greater proportion of investor returns come from growth, and dividend payout rates gradually fell.
The past few years have seen a reversion to the previous trends.
Government bond yields have fallen, in some cases to negative rates, and by comparison equities have become the more fruitful hunting ground for the income-seeking investor.
This is clearly not without its risks, however.
Equities are more volatile than bonds because of their place at the back of the queue in the capital structure of companies, and in a world where income is hard to find there is also risk in their very popularity.
Shares with reliable dividends have risen to heady valuations, and businesses that can reliably increase their payouts fetch even higher multiples.
In recent years this has been very profitable for investors in high-quality and defensive stocks, but it now leaves shareholders vulnerable when companies cannot sustain their payouts.
Sainsbury’s, Rolls-Royce, Rio Tinto, Centrica and BHP Billiton have all cut their dividends since the start of this year, and their shares have suffered as a result.
For income investors who want to diversify away from equities, alternative assets provide a number of opportunities.
From traditional bricks and mortar property to innovative debt structures involving the leasing of assets, an increasing assortment of funds is available.
Each must be assessed in the context of its likely risk. How secure is the income? Is the asset liquid? What supply and demand factors drive it?
UK commercial property is well supported, as the British economy continues to grow faster than others and vacancy rates are low, although the uncertainty surrounding the European Union referendum may reduce capital stability a little.
Funds that invest in public infrastructure projects have become a magnet for income investors. In many cases, these projects’ government-backed yields have an element of inflation linking.
As a result, the vehicles trade at a premium to their net asset values, but the fundamentals behind them are strong.
With growth still sluggish in much of the world, there is increasing ambition by governments to use infrastructure projects to stimulate their economies.
However, high public debt levels and constrained budgets make it difficult to fund this via public spending, so there is likely to be continued demand to raise capital for infrastructure spending from private investors.
