Dividend yield and dividend growth have been the most substantial drivers of equity returns in the UK over the long term, according to Ewen Cameron Watt, chief investment strategist of the BlackRock Investment Institute, part of the giant US money management firm.

According to Cameron Watt, over the past 30 years UK equities averaged annual returns of 11.8 per cent, with 4.3 per cent driven by dividend yields, 7.0 per cent driven by dividend growth, and 0.2 per cent driven by a change in multiples.

This illustrates that dividend growth and yield are the primary drivers of real annual returns. The pattern is consistent across global markets, such as the US and Japan, and especially Australia and Germany.

During bull markets – such as the dotcom boom of the 1990s – investors were often urged to focus on capital growth in equities at the expense of dividend payments. Also, a company’s dividend policy can be affected by issues such as the taxation of dividend income, encouraging firms to increase their gearing to raise return on equity.

Historical data from institutions such as Credit Suisse, in its Global Investment Returns Sourcebook 2011, showed that real equity returns globally averaged 5.5 per cent - annualised - between 1900 and 2010 (the data is adjusted for inflation). Over the long run, reinvesting dividend income significantly raises total returns over time.

However, recent worries about inflation and negative returns on cash have encouraged wealth managers such as Sarasin, the Swiss firm, to seek dividend-paying corporates in its investment strategy.

“A focus on high yielding equities plays an important part of investors’ portfolios during market downturns. During the so-called ‘lost decade’ of 2000-2009, the cumulative return for the MSCI All Country World Index stood at -12.35 per cent. When dividends were reinvested, the cumulative return stood at +9.26 per cent, demonstrating the value that dividends can deliver even during challenging market environments,” said Watt Cameron.

With UK interest rates at an all time low and inflation eating away the returns of government bonds and cash, investors need to look at income equity as an alternative investment strategy, especially with global, European, and resources sectors providing excellent opportunities in income equities, said Tony Stenning, head of BlackRock's UK retail business.