Investing has always been a hare and tortoise game. The frenetic pursuit of rising share prices worked well enough in the 1980s and 1990s, but the hare has pretty much been asleep since then. The FTSE 100 has made no price progress in 12 years. An investing tortoise who had chosen government bonds over the past 10 years would easily have beaten the hares, managing a real return of 2.6 per cent a year after inflation. Share investors lost 1.2 per cent over the same period, according to the Barclays Equity-Gilt study.
In such times, the case for income is not in doubt. The trouble is, where do we find it? After doing so well for so long, gilts are no longer a screaming buy. Yields are historically low, and there is a huge weight of new issuance to soak up a UK national debt that is expected to swell to £1.6 trillion.
That leaves us either looking abroad for better-value sovereign debt, or back to companies, either through bonds or dividends. There are problems with the usual sources of dividend income, though. When even giant companies such as BP have to cancel a dividend, the intrinsic lack of reliability of individual share payouts is clear. Certainly, the workhorse dividend-generators – utilities, pharmaceuticals and telecom companies – are still a good bet. But in a low-growth economy, these are unlikely to produce much income growth.
