With interest rates at record lows in most industrialised economies, many investors are looking for alternatives to cash. Over the past 2 years, the bulk of these funds have headed to corporate bonds. However with treasury yields near record lows, many are now looking for a higher yielding return. Many of these funds now look set to head towards high quality dividend paying equities.

In the past, many investors shunned dividend paying equities, preferring instead to look at high growth stocks that reinvested all of their profits. A famous case was Vodafone in 2006: on announcing to the market record profits and a big dividend, the share price dropped 10% in a day. This was because investors no longer viewed the fund as a growth stock.

However, with investors desperately trying to find alternatives to cash, dividend stocks are becoming the hot place to go. Two major factors driving this flight to equities are increasing profitability of companies and comparatively high yields.

The yield of an investment is essentially the interest rate that it pays. An investment’s yield is calculated by dividing the cash payment it makes in the form of a dividend or coupon by the price the investment trades at in the market.  Money flowing into debt markets has pushed high investment grade corporate debt yields down to around 2.5%. The average dividend yield on the FTSE is 3.5%. Factor in capital appreciation of the stock, and equity yields begin to look much more attractive in comparison to the bond yields. Many high grade companies on the FTSE 100 are offering over a 6% yield.

Expectations on main markets next year are for an increase in company profits of 37% against 2010 earnings. This will take earnings back above 2007 levels and should see equity markets top out in 2011 at their 2007 levels. Over the past 3 years, companies have slashed costs substantially and increased their cash balances. With little in the way of M&A activity, much of this cash is likely to be returned to investors in the coming years. As economies improve and demand picks back up, companies with lower cost bases will be much more profitable than they were in 2007 further adding to dividends.

We have outlined some of our best dividend plays in Sterling, Euro and US Dollars below:

Scottish and Southern Energy is a utility company predominantly involved in electricity production inside the United Kingdom. The company has a strong track record in increasing its dividend. The yield presently stands at 6.18%. National Grid is another top UK dividend pick. The company is responsible for gas and electricity transmission in the UK and eastern United States. The dividend yield is currently standing at 6.77%.

Dividend yields in the US tend to be lower than their UK counterparts. However, two that stand out are Kinder Morgan, a US and Canadian based company that deals in gas transmission and treatment, as well as Southern Co., a utility company covering four states in south eastern United States. Kinder Morgan is currently paying a dividend of 6.19% and Southern Co. is paying 4.75%.

Amongst European stocks, Deutsche Telecom stands out as having a strong track record on dividend payments. The current yield is 7.43%.