While the General Election’s historic implications continue to unfold, investors are quietly taking stock and, in what’s turning into a collective act of shrewd judgement, buying equity income stocks with increasing enthusiasm. Large-cap, ‘defensive shares’ are proving popular, not least because many were left behind during the market’s surge last year, when a number of cyclical stocks performed well beyond expectations.

Aside from their attractive dividend yields, perhaps the other reason for the appeal of ‘defensives’ is that they now offer potential for capital growth.

According to several commentators, this combination makes defensive stocks more alluring than say, bonds, especially should inflation continue to rise. Whereas inflation eats into a bond’s fixed value, companies can raise dividends to keep pace with prices.

This is important because the stock market tends to reward companies that distribute cash to shareholders in the form of increased dividend payments, rather than re-invest it in fixed assets.

Thankfully, the corporate inclination to hand money back to shareholders is already underway, as previously dormant share buy-back programmes are currently enjoying a renaissance.

For example, recently AstraZeneca has been buying back its own shares and is committed to buy at up to $1bn of them this year. As I write, the company’s dividend yield hovers around five per cent.

When it revealed its financial results in February, BAE Systems also announced the initiation of a programme to return up to £500m to shareholders by way of a repurchase of shares.

By early May, 72 million shares had been bought at a cost of £268m — the dividend yield is a shade under five per cent.

But, according to Morgan Stanley, share prices respond with even greater vigour when companies raise their dividend payments, rather than buy their own shares back.

The bank calculates that over the past 14 years, companies announcing the largest dividend increases have risen in value by an average of 17 per cent, compared with eight per cent for those that have pursued a strategy of share buy-backs.

Morgan Stanley believes our appetite for steady and/or increased dividends is likely to be maintained for some time, due to three principle reasons.

First, investors mulling over possible acquisitions of defensive shares may find themselves persuaded by their dividend returns which, on average, yield around four times more than high street banks pay on cash deposits.

Second, ongoing volatility in the bond market combined with inflation’s steady creep upwards makes equities considerably more attractive.

Third, demographics plays an important role. The ageing baby-boomer generation will increasingly demand greater levels of income from their stock portfolios, rather than capital growth.

So where should investors look for steady, sustainable dividends?

Morgan Stanley suggests investors should turn their attention towards stocks with a history of raising their dividends.

A clutch of listed companies, including National Grid, Imperial Tobacco, Centrica, British American Tobacco and BAE Systems fall into this category and presently offer average yields of 4.88 per cent.

There are several features which differentiate defensive stocks: strong cash flow, stable demand for their product and a handsome dividend yield.

While the new Government gets its bearings and the economic outlook remains unclear, the companies mentioned and several more like them, will continue to appeal to investors for very obvious reasons.