INTEREST rates are at a record low, and likely to stay that way until next year at least, writes Samantha Dolby.

Yields on most Government and high-grade corporate bonds are also well below their historic average, and the risks of holding them are rising.

It is, therefore, unsurprising that investors looking for income are attracted to other assets classes and, with a growing number of companies offering apparently attractive dividend yields, the stock market can seem an obvious place to turn.

But, as many investors have found out to their cost in recent months, dividends are not guaranteed.

Some of Britain’s largest companies, including Tesco, Sainsbury’s, Standard Chartered, Centrica and Anglo American, have already cut their payments and Capita Asset Services, which produces a quarterly Dividend Monitor, warns there could be more cuts to come.

It forecasts total dividends for UK plc will fall 1.3 per cent to £86.5bn in 2016.

The picture for dividends is very mixed and we are far less certain about the outcome for the year ahead than we have been for several years.

Some very large UK-listed firms have slashed their payments lately and there may be more bad news to come.

Meanwhile, currency effects continue to add considerable volatility to UK payments.

It is vital to understand the risks of buying high-yield companies for income.

The first thing to consider is whether the dividend is sustainable: a high yield can often reflect the market’s expectation that a dividend will be cut – for example it might be the result of a share price slump, which leaves the dividend looking attractive but only because the market has re-priced the stock.

When buying stocks just for their dividend, there is the risk of concentrating investments in a few sectors.

In 2015, just 15 companies accounted for 55 per cent of total dividends from British companies.

A third of them were from the oil and mining sectors, where falling prices have increased the risk of cuts.

A decade ago, the top rank of dividend payers was dominated by banks, many of which cut, or even abandoned, their payments during the financial crisis.

Even if the large oil companies maintain their payments this year, they will have to borrow money to do so, thereby potentially weakening their future position.

Investors should instead focus on companies with lower yields but which have a greater certainty of dividends being paid or – better still – increasing.

There is also currency risk to factor in.

Many of the biggest companies, including HSBC, BP and GlaxoSmithKline, declare their dividends in dollars.

That has worked in investors’ favour in recent years as sterling has weakened against the dollar.

Should that reverse, however, the actual amounts that UK investors receive would be reduced by exchange fluctuations.

This leads on nicely to diversification, where a spread across a range of different shares and assets is also essential.

Many international companies offer a respectable yield too.

It is impossible to predict which income streams will falter, but certainly some will.

Samantha Dolby is an investment manager at Brewin Dolphin, in Newcastle.

The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin. No director, representative or employee of Brewin Dolphin accepts liability for any direct or consequential loss arising from the use of this document or its contents. Any tax allowances or thresholds mentioned are based on personal circumstances and current legislation which is subject to change.