Income investing has been in vogue for some time now in the world of equities, but is this just a passing fad or are there more sustainable, structural reasons for an income approach?

Certainly the descent of bond yields globally has helped dividend-paying stocks do well over the last decade.

With interest rates now on the rise again globally, that trade might well be over, so are there any reasons to still maintain interest in an income approach in a reflating world?

Led by the US, interest rates may be rising at last, but we remain in a relatively low-inflation, low-interest rate world where income is scarce. If an investor can own an equity that pays a dividend as good as or better than a bond and also participate in the growth of that business then there is a lot to be said for it.

With many populations around the world experiencing a large shift into retirement age, the need for sustainable income streams has never been more urgent. The attraction of growing income streams with the inherent inflation protection that equities offer is therefore attractive.

There is a bigger picture. Income stocks, and the income funds that own them, tend to have lower volatility and lower peak to trough falls than the market as a whole. This is a real positive as, mathematically, a volatile return stream has to work harder than a less volatile one in order to generate the same risk-adjusted returns. Volatile returns exacerbate the impact of entry and exit points and, given how difficult it can be to time the market, low volatility is generally an investor’s friend.

One of the concerns of a global emerging market investor is knowing whether they can trust the numbers. Not only are emerging markets a more volatile asset class, they also tend to have lower standards of corporate governance.

A sensible, repeatable dividend policy can be an indicator of good corporate governance, and of a solid, cash-generating underlying business. An appropriate dividend payment can indicate a solid alignment between management, majority owner and shareholder in a company. This is a valuable factor when investing in emerging markets.

An income approach to investing in emerging markets brings a positive selection bias in which the investor looks for companies that care enough about minority shareholders to distribute the results of their efforts in hard cash. There is a real ‘show me the money’ point about this that offers a great comfort.

Emerging markets are not typically thought of as the natural habitat of income investors, yet looking over the last 30 years, and at most shorter time periods in between, dividends have accounted for around 55 per cent of total returns to equity investors during that time - not dissimilar to the total returns for developed markets. This is an impressive statistic, and one that reinforces the point that in a volatile world, that cushion of income goes far in protecting the effects of volatility and giving investors a cash return, even in trying times.

Sustainability is always key. A one-off dividend that cannot be repeated, while appropriate in certain circumstances, is not as powerful as an ongoing, growing and compounding dividend stream. Raising debt to pay a dividend or paying a dividend off the balance sheet can be helpful in optimising a company’s capital structure, but the real thing to look for is a business with strong underlying cashflows from which a dividend can be reliably and sustainably paid.

If those underlying cashflows have growth, then there is the prospect of a growing dividend stream. This, it might well be argued, is the holy grail of the equity investor – the prospect of both income and growth.

Mark Vincent is manager of Standard Life Investments’ Global Emerging Markets Equity Income Fund.