INVESTORS who need income have traditionally opted for savings accounts and bonds. That was believed to be the safe approach. In the conventional view, equities were what you bought when you wanted long-term capital gains.

That view was always short-sighted; over 20-year periods around half of the total return from American shares comes from reinvesting dividends. But ignoring the income-generating appeal of equities looks particularly odd now. The dividend yield on shares in America, Britain and Japan is higher than the yield on ten-year government bonds; in the case of the latter two, the difference is more than two percentage points (see chart). The gap is nothing like as big in America, although many would argue that share buy-backs materially boost the effective yield.

For investors who started their careers in the 1980s and 1990s, this relationship looks very weird. For them, the norm was for bonds to offer a yield many percentage points higher than that from equities. As a result, when, in 2003, the dividend yield on British shares rose above the government-bond yield for a few days, many investors saw it as an...Continue reading