Recent Craigs research highlighted that in 2008, an investor wanting a $60,000 income from then deposit rates of 8.2% needed $730,000 to invest, but with present deposit rates slashed to 4.2% and inflation rising, the same income today required about $1.57 million to invest.
"It's this dividend growth which provides investors in shares with protection against inflation and other risks, such as falling interest rates," Mr Watson said in research released last week.
He cautioned dividends were subject to change and there was also share price volatility, with many companies forced to reduce dividends during the tough times of the financial crisis.
However, Mr Watson said two "future-proofing" options for investors' to consider were to "ladder" both short- and long-term deposits, bonds or other fixed-income holdings by having varying maturity dates.
If domestic interest rates fell, long-term deposits came to the rescue, with their fixed incomes, and conversely if interest rates rose, short-term holdings could be reinvested sooner at the new higher rates, he said.
Mr Watson said many New Zealand investors did not consider shares and property as income sources, but there were quality domestic shares yielding 5%-7% or more; Australia shares yielding around 4%-5%, albeit without franking.
There were also global shares which were lower yielding but blue chip and reliable for 2%-3% yield.
"We are fans of balanced portfolios, where fixed income and growth assets like shares and property are combined in a mix that suits circumstances, goals and risk tolerance," Mr Watson said.
He highlighted the percentage dividend growth over 11 years of seven New Zealand companies, which collectively averaged 13.8%, alongside forecast 2011 gross yield expectations, collectively averaging 5.1%.
Ryman Healthcare gained 19.8% over 11 years, with a 2011 forecast of 2.6%; TrustPower was 15% and 6.6%, Auckland International Airport was 13.8% and 5.9%, Mainfreight 13.7% and 3.3%, Port of Tauranga 10.5% and 5.1% and Ebos 9.9%, and 7% for the forecast year.
On considering dividend growth, Mr Watson said investors should look at companies with a track record of dividend growth and a clear dividend policy.
"[However] beware of companies which pay out too much of their earnings in an attempt to attract income investors, at the expense of future growth."
