INVESTOR: With a dividend yield that is well above average, electricity company Viridian provides some comfort in a tough climate .

Over very long periods of time historical studies of stock market returns have found that about 50 per cent of the total return delivered by equity markets has come by way of dividend income rather than capital gain.

After three years of negative capital returns from most global stock markets many investors are rediscovering the importance of dividend income.

For much of the 1980s and 1990s a dividend yield of 2-3 per cent seemed insignificant when equity portfolios were regularly generating annual capital gains of about 20 per cent.

Even though many stock market indices are now trading at 50 per cent (or below in some cases) of peak values, very few stock market analysts are forecasting a strong recovery in share prices.

On the contrary there seems to be a growing consensus that the prospective medium-term returns from equities are likely to be quite modest. A long-term average annual total return from equity markets of about 8 per cent is now a general expectation.

This is roughly half the average annual total return achieved by many stock market indices during the 1980s and 1990s. If returns from equity investing do indeed average 8 per cent per annum going forward, the increased importance of dividend income is illustrated from consideration of the UK equity market.

At current prices the prospective dividend yield on the UK equity market is close to 4 per cent, which implies that capital appreciation may average as low as 4 per cent per annum.

Set against the high volatility in share prices, where even on a daily basis equity indices can move by as much as 1-2 per cent, some investors may feel that the risks associated with equity investing are too great. Despite the risks, total returns of 8 per cent per annum would still be well above the paltry returns available from low-risk deposits and government bonds.

Therefore, those investors who decide to stay with equities are likely increasingly to seek out companies that are paying a high and sustainable dividend yield.

The overall dividend yield of about 3.5 per cent on the Irish equity market is not quite as high as that available in the UK. Investors seeking dividend income have long favoured Irish financial stocks, which account for a very high proportion of the total ISEQ market capitalisation.

Outside of the financial stocks there are a small number of companies that offer attractive dividend yields.

One of the highest yielding is the Northern Ireland electricity company, Viridian, which is quoted on both the London and Irish exchanges. It offers investors a historic dividend yield that is well above the average yield of the overall market and at its current price of £5 (€7.44) it is yielding a very attractive 6.4 per cent.

Utility companies involved in the production and distribution of gas and electricity generally trade on relatively low price-earnings ratios and high dividend yields.

For example, Scottish Power currently produces a dividend yield of 7.4 per cent, while Scottish & Southern Energy has a yield of 5.1 per cent.

The main reason for these low valuation ratings is that these businesses are subject to very tight regulatory regimes in most jurisdictions.

This regulatory situation reflects the monopoly or quasi-monopoly market position of most of these enterprises. In addition power generation in particular is extremely capital intensive and these businesses require intermittent but very large capital investments.

On the positive side the demand for electricity and gas is very steady and grows in close relationship to the growth in the overall economy.

Underlying long-term growth for electricity is good but the extra profitability of this growth is constantly being squeezed downwards by the actions of regulators. Investors, therefore, view these companies as ones that are likely to exhibit slow growth in profits due to persistent downward pressure on profit margins.

The only way for companies such as Viridian to enhance profit margins is through very tight cost control and/or diversification into non-regulated activities. During the technology boom Viridian did try to diversify into IT services but has since withdrawn from this sector to concentrate on its core electricity business.

The company's transmission and distribution business currently accounts for over 70 per cent of operating profits and there has been a recent agreement with the regulator in Northern Ireland for price controls on the business for the next five years.

Viridian is also expanding into the Republic of Ireland electricity market, which is progressively opening up to competition. Its Huntstown station will become fully operational during 2003 and will be contributing to revenues.

Viridian's dividend looks very secure and although it may only grow at a slow pace a dividend yield of 6.4 per cent looks very attractive in the current uncertain climate.