The latest series of half-point interest rate cuts from the Federal Reserve, Bank of England and the European Central Bank (ECB) set the scene for a prolonged period of historically low interest rates across the globe.

Despite the current reality of 2 per cent dollar interest rates, money markets are factoring in even lower short-term rates in the first half of 2002. These interest rate cuts, combined with the belief that they are likely to be pushed even lower, have served to bolster confidence in the world's major stock markets.

In the week to 10 days since the central banks took action, share prices have enjoyed steady if unspectacular price gains. However, most analysts agree a return to a more bullish scenario is still some way off.

This low interest rate environment does bring into sharp relief the relative attractions of those equities that offer high dividend yields. On the wholesale money market, three-month euro interest rates are now just below 3.5 per cent, whilst one-year money is trading at just over 3.1 per cent.

The majority of retail deposit accounts offered by banking institutions have interest rates well below these levels, depending on the size of the deposit. In the bond market, a one-year Irish government bond is offering a yield of barely 3 per cent. In comparison, Irish-quoted financial shares now offer historic dividend yields ranging between 3 and 3.9 per cent.

Over time, these dividend payouts to shareholders would normally be expected to grow roughly in line with the overall rate of growth of the economy. On the face of it, therefore, investing in Irish financial shares seems like a very attractive proposition, especially compared with the alternative returns available from Government bonds and bank deposits.

As always there is a catch and it relates to how confident we can be in the capacity of the banks to generate sufficient earnings over the long run to fund a growing stream of dividend payments to shareholders. One of the key ratios enabling us to formulate a judgment in this regard is dividend cover shown in the accompanying table. This is the ratio of earnings per share to dividends per share.

For example, Bank of Ireland's dividend cover of three means that its earnings are three times its dividend payments. Clearly, a higher ratio means that the institution has a greater capacity to meet its current dividend payments and to grow those payments over time.

First Active and Irish Life have a somewhat lower cover of 2.4 in each case, whilst Anglo-Irish Bank has the highest cover of the companies listed. However, its dividend yield is much lower than that of its peers - 3 per cent versus 3.9 per cent available from an investment in AIB.

These yardsticks of relative value and financial strength show the Irish-quoted financial sector in a relatively favourable light in an international context. For example, the dividend yield on the bank sector of the FTSE-All Share Index currently stands at 3.4 per cent, exactly in line with the average of the Irish financials.

The dividend cover of the British bank sector, at 2.0, is somewhat lower than the Irish stocks. A perspective on the global banking sector is given by the Bank Industry sub-sector of the FTSE-World Index Series, which shows an average dividend yield of 2.9 per cent.

Historically, the boards of financial institutions have tended to keep the dividend cover above a figure of two. Most banks and insurance companies pursue a policy of steady dividend growth and are loath to cut their dividend - so declining dividend cover ratios are usually due to falling profits.

Therefore, the trend in dividend cover provides critical information regarding the sustainability of a financial institution's dividend-paying capacity.

In this respect, the current dividend cover ratios of the Irish financial stocks give no cause for concern. Nevertheless, the sudden deterioration in the Irish economy in recent months does raise the spectre of falling profits in the banking sector some time over the next 12 to 18 months.

So far, bank managements have indicated that the rate of profit growth has slowed sharply, but profits are still expected to grow. However, if the downturn proves to be prolonged and/or more severe than expectations, then growing bad debts could lead to some decline in banking profits.

Therefore, despite their apparent attractions, the high degree of uncertainty regarding the economic downturn indicates maintaining a cautious stance.