Having just written a series of blogs on income investing, I feel like I’m part of a movement. A growing band of investors, fund managers and journalists touting income as a safe and profitable way to invest in the current market. But there’s something about this story that makes my contrarian flesh creep. It’s not just a band its a bandwagon.

SG, the investment bank that invented a quality income index has also launched a structured product, a derivative, an exchange traded note (SGQI) that tracks the index for the next three years, which is listed in London and therefore available to private investors.

The FT last weekend quoted investment banks, fund managers and brokers, all touting dividends.

Advocating income strategies Morgan Stanley repeats a fact I’ve seen used a lot recently, that the majority of market returns come from dividends. I think that’s misleading. If you’re aiming to beat the market, you need to know your source of excess return not market return. Is it dividends?

High yielding stocks have beaten low yielding stocks for more than a decade, a period characterised by a precarious stockmarket and falling interest rates that has induced investors to embrace dividends for income and stability. In previous decades the performance of high income stocks has been more equivocal.

SG, PSigma, Morgan Stanley, Brooks Macdonald, HSBC Private Banking, are all advocate buying big, financially strong dividend payers.

As bandwagons go, this one is way below buy-to-let mortgages or dot.com stocks in the list of heinous industry-serving investment fads because there’s a built in limit to subsequent excess. Insisting on decent dividend yields makes it difficult to overpay for a share because high prices mean low yields, and financially strong companies make worthwhile investments so long as they’re not too expensive.

The quality income bandwagon will almost certainly be profitable if investors stick with it through thick and thin.

Contrast that to dot.com stocks or sub-prime mortgages when many of the opportunities were worthless, and escalating prices were the reason people invested.

Even so, I don’t think it’s healthy when investors think good companies pay generous dividends and bad companies don’t, and I think it’s particularly unhealthy if investors think current dividends, those paid by companies on high dividend yields, are the primary source of future investment returns.

Future dividends are the primary source of future investment returns, and they come from investment now. The more a company pays out in current dividends, the less it has to invest. And what much of the developed world needs now is investment to stimulate economic growth and future competitiveness.

The government can’t afford to invest, consumers can’t afford to spend, but companies can. They have unusually high levels of cash. I’ve argued previously they’re not investing because investment is a cost now that will generate a return later but executives need profit now to ‘earn’ their excessive salaries and bonuses.

The executives of big, profitable financially strong companies are doing a better job when putting that money to work where they can find profitable opportunities and their owners, shareholders, ought to be encouraging them.

But if investors fixate on current dividends, only buying companies on high yields, they’re sending a signal to our best companies to invest less and stoking the consume now, worry later culture that got the economy into a mess in the first place.

Fair enough, for investors who need the income now, but those of us who seek to build a future income should embrace the likely sources of that income.

That would be companies investing wisely now, whether or not they pay a dividend.