It may have been a good idea to be in cash in late 2008, but it may be less appealing now, in this low interest rate environment.

If you pay tax at the top marginal rate you might be lucky to get 1 per cent to 2 per cent a year after tax from cash in the near future. Subtract inflation and your cash investment is going backwards. Even for zero-tax retirees, the yield that was once there has just about halved – and is close to zero after inflation.

Dividends from equities used to be a solid base for many yield-seeking investors but with the controversies around some property trusts can we go back to equities?

Everyone is worried about downward revisions to earnings and dividend forecasts – and they are real – but how bad are they?

Our research shows that the dol lar dividend payout for the aggregate sharemarket in 2009, derived from a consensus of broker forecasts, is ex pected to be off by about 7 per cent. However, some sectors have been more affected than others.

The accompanying graph shows the growth during 2008 of the total dollar value of dividends forecast by sector, with the emphasis on stocks with the highest total dividends. Five sectors had declining forecasts, with industrials and property suffering the brunt of these revisions. Of the six sectors with positive revisions, analysts were most optimistic about dividend increases in materials and energy.

While the dollar payout might be off former highs – which means lower yields for those who bought at higher prices – stock prices fell by around 40 per cent over the year. So where does that leave us now? The fall in prices more than offsets the contraction in the expected dividends paid.

Therefore, getting into the market now might yield some surprises. For example, we calculated that the big four banks would have yielded 4.9 per cent over 2008 if bought on Janu ary 2, 2008 (equally weighted). This year the expectation for those same investors is steady at 4.9 per cent, as consensus forecasts suggest the big four banks will maintain their divi dends in 2009.

But for new investors who bought on January 2, 2009, the expected yield would be much higher, at 9.0 per cent. Actual and forecast yields (including franking credits) for the big four banks over the past 10 years have been fairly stable, with an average 7.3 per cent. Importantly, there was only one over-prediction of more than 0.1 percentage points – in 2008, the forecast of 7.6 per cent compared to an outcome of 7.0 per cent. For 2009 the forecast is 12.9 per cent.

Since the banks have been paying fully-franked dividends, the after-tax returns for 2008 and expected after-tax returns for 2009 are 3.8 per cent and 6.9 per cent respectively at the top rate and 6.0 per cent and 11.0 per cent respectively at the super tax rate (15 per cent a year). Comparing these returns to actual and expected after-tax returns in cash, high interest rates at the start of 2008 kept pre-tax cash returns for the year up at 7.3 per cent (if invested in 90-day bank bills) or 3.9 per cent after tax at the top tax rate.

However, expectations for 2009 are much lower with the consensus expectation for pre-tax cash returns at less than half last year’s rate. So with interest rates anticipated to con tinue their downward trend, equities are becoming more appealing.

The big plus in investing now in solid, large market cap, high yielding equities is that the price of the stock doesn’t have to go up to maintain yield if dividends hold up or increase. Even if stock prices go down further, unless you sell, there is no actual off setting loss. And think, when prices do take off – and often they take off rapidly when they eventually do rise after a bear market – you won’t miss the opportunity cost of buying too late (and reducing your yield!).

Really long-term investors might not have to pay capital gains tax until they retire and this will possibly be at lower tax rates.

So if you sat in cash throughout the miserable year in equities that was 2008, you won’t really win unless you keep making smart decisions. If you got caught out by a rapidly falling equity market in 2008 but have some new money coming to hand – where are you going to put it?

Never lock up all your assets in equities – keep some aside for living through bad times – but your wealth will struggle to grow after tax and inflation if you sit on the sidelines forever.