Capital that does not produce income is pretty much worthless. What about Berkshire Hathaway, Apple or gold many will shout? The truth is that no one is more aware of the importance of dividends than Warren Buffett. That is why he doesn’t pay any. In the case of Apple, and many other technology companies, the executives know that product cycles are getting shorter and shorter and that they need to conserve cash to develop the next product. And there is no guarantee it will sell as well as the last one. Ten years ago markets valued Nokia and RIM at 50 years of such earnings. Now, they are struggling to adapt to a re-vitalised competitor that itself was near extinction just fifteen years ago. The argument for gold is simply that while it might have a negative nominal yield it has a positive real yield as inflation preserves its value.

In any event these examples are at the fringes of most people’s portfolios. What matters most to the average investor is how to split a portfolio between bonds and equities. There are all sorts of rules of thumb on this and the growth in asset allocation strategies, some driven by cash flow forecasts, has made it an increasingly important topic.

At the core of the argument, and looking at things in a purely UK context, is how much value should be placed on the £47 billion of income that HMG pays out on its borrowings compared to the £76 billion of dividends generated from companies in the FTSE 350 Index. In other words if equities provide 62% of the£123 billion income stream should they form 62% of the assets? As 2011 evolves into 2012 the relative valuations are vastly different. While the nominal value of UK sovereign debt stands at £1 trillion its market value is higher at £1.138 trillion. Contrast that to the current £ 1.73 trillion market value of the FTSE 350. In total these two markets are valued at £2.868 trillion of which 60% is in equities.

Those figures must be accurate because there is an army of brokers, fund managers, journalists, commentators and rating agencies looking at the data every second of the day. That is not to say though that it won’t change.

We know that debt payments from HMG are going to…

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