James O’Shaughnessy’s firm says that we’re in the most difficult environment for generating income in at least 140 years, and that the best place for investors to look for yield is international equities.

Since 1871, the average yield generated by a portfolio with 60% in stocks and 40% in fixed-income investments has been 4.4%, O’Shaughnessy Asset Management’s Ehren Stanhope and Travis Fairchild write in a research paper available on the firm’s website. At the end of 2012, the figure was just 2.0% — an all-time low.

Stanhope and Fairchild look at a dozen different income-generating asset classes, and find that the spectrum of current yields is “shocking”. Nearly all of the assets currently offer yields at or near their all-time lows. They also discuss the impact of interest rate risk on fixed-income assets — which they say is significant. The U.S.’s poor fiscal condition makes inflation a very possible scenario in coming years, they say, as policymakers try to inflate away our debt. “Though the Federal Open Market Committee has announced its intent to continue monetary stimulus, the impact of price declines — as measured by duration — from even modestly rising rates would, in most cases, dwarf any income received on those assets,” they write.

The fact that stocks have historically performed better than other assets during inflationary periods is one reason OSAM recommends global high-dividend stocks. A few more they offer:

• Global companies provide access to growth at substantial discounts and higher yields than U.S. companies.
• Dividend yield has historically been a superior factor for stock selection in global markets.
• A global portfolio provides diversification of income generation across monetary, currency, and interest rate regimes.

“Given that domestic corporations are sourcing growth from a global opportunity set, we advocate that investors do the same,” write Stanhope and Fairchild. “Valuations of international equities are discounted, while yields are offered at tremendous premiums compared to the United States. Our research leads us to believe that high-quality, global, dividend-paying equities — often under-allocated in investor portfolios — will be an effective agent of income generation and growth of principal in investor portfolios for years to come.”