It’s the era of easy money. The world’s central bankers are trying to stimulate economic growth and create jobs by keeping interest rates historically low. Of the 10 major economies in the world, only three countries have short-term interest rates exceeding 0.5%. Another three have negative short-term interest rates: borrowers get paid and savers penalized.

And there’s no end in sight. Among the major economies, only the U.S. is expected to increase short-term interest rates in 2016. In Canada, the Central Bank cut interest rates twice in 2015 and is not expected to increase rates until 2018.

Why should we care? Because income investors are directly affected. Very low short-term rates keep long-term rates low. In the U.S., 10-year government bonds now yield 1.5%; in Canada, the rate is 1.1%; and German and Japanese government bonds offer negative yields: investors that hold the bonds to maturity will get back less than they invested.

As a result, retirees and other income-seeking investors are struggling. Gone are the days that a bank deposit, savings account or government bond could deliver a reasonable income at minimal risk. Today, investors need to take on more risk to generate reasonable income – for example, by investing in high-yield corporate bonds or dividend-paying equities.

Quality dividend-paying equities are a good solution, but only for long-term investors. While a high-quality dividend portfolio such as the Dividend Champions yields around 4%, the capital is not guaranteed and can go down in the short term.

For longer holding periods, the risk of capital loss declines. History suggests that for investments into U.S. dividend-paying equities with holding periods longer than five years, the risk of capital loss is less than 10%. For holding periods longer than 10 years, the downside risk is less than 5%. And it’s essentially zero for holding periods over 15 years.

Because dividend investing has become popular among all income-seeking investors, let’s consider whether valuations on these stocks are still reasonable.

To perform the analysis, let’s use one of our favorite Dividend Champions, BCE Inc. (TSX:BCE, NYSE: BCE) as a representative example of the wider Canadian universe. BCE has a tremendous track record of paying a growing stream of dividends stretching back over 60 years. For the past 10 years, dividends have grown by 7% per year, comfortably ahead of inflation. Prospects are good for BCE’s dividends to continue growing 5% per year for the foreseeable future. The dividend yield on the stock is currently 4.2%, versus the 1.1% yield to maturity on a Canadian government 10-year bond.

The graph on page one compares these yields by illustrating BCE’s so-called bond yield ratio: the dividend yield on BCE shares divided by the yield to maturity for the government bond. A bond yield ratio below 1 indicates that the dividend yield on a stock is lower than the yield on the government bond. This used to be the norm for quality companies paying growing dividends.

However, since the 2008-2009 financial crisis, bond yield ratios moved higher as central banks kept interest rates low while dividend yields on stocks did not make the same adjustments.

Note that the bond yield ratio for BCE is currently well over 3 times — much higher than its historical average. This indicates that BCE is attractively priced relative to government bonds.

There are a few possible explanations for this situation:

investors hold the view that bond yields will eventually move much higher, or

dividends will decline and therefore the current relatively high dividend yields are illusionary, or

that equity investments are just too risky to be considered a reasonable alternative for fixed income investments.

We do not agree with any of these explanations. As indicated earlier, there are very few indications that interest rates will be moving decisively higher any time soon. Even if rates were to move moderately higher over the next two years, the gap of dividend yields over long bond rates provides ample protection to equity investors.

While an individual stock could cut its dividend, it’s unlikely that the dividend yield on a high-quality portfolio such as the Dividend Champions will decline, even if the economy worsens considerably.

Meanwhile, as we discussed earlier, equity investments are actually fairly safe for investors with a time horizon of five years or longer.

So with the world’s central bankers keeping bond yields low, high-quality companies with growing dividends are the best choice for long-term income-seeking investors. Our well-diversified Dividend Champions portfolio currently offers a dividend yield of around 4%, with expected dividend growth of 5%-10% per year for the next few years. Bonds just can’t compete.