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A quarter of FTSE 350 companies could cut or scrap their dividends in the next 12 months, according to Brown Shipley.

The private bank said reduced dividend payments will hit income investors already hurt by problems in the banking sector.

Banks previously provided as much as 30 per cent of total income from the UK market. Investors have experienced drops in both capital value and income from the peer group.

To offset the falls in income, Brown Shipley suggests a diversified strategy investing 30 per cent in UK equities, with the remainder of the portfolio held in bonds, corporate bonds, cash, overseas equities and property.

It says equities will need to be selected on the probability of their actually paying dividends and recommends an overweighting to key sectors such as oil and utilities.

Peter Botham, chief investment officer, said: "Our view is that current equity market levels present an opportunity to invest, which will be rewarded over the medium term. Warren Buffett recently stated that he had no idea whether the US equity market would be higher in a year's time, but on a longer timescale he felt very positive about committing funds into equities and we agree."

Mr Botham suggested certain stocks could also provide more certain income as interest rates drop further.

"One reasonable way of determining 'value' is to look at the income that will be derived from equities versus cash. As it seems a certainty that interest rates will be falling, the return from cash is set to become negligible, particularly for higher-rate income tax clients. Therefore, the second prime use of our core list will be to provide yield with a high degree of certainty."

Despite the problems in the banking sector, HSBC is a core stock holding, currently yielding 6.3 per cent. BP on a yield of 6.1 per cent and Vodafone on 7 per cent are also attractive alternatives to cash and gilts.

Brown Shipley expects its core stocks to increase their dividend payments over the next year.

Mr Botham added: "Not only did BP raise its third-quarter dividend by 29 per cent, but, in a rare bit of good news for shareholders, the weakness of the pound against the dollar will mean a 40 per cent increase for UK-based investors. It is becoming clear that oil will now replace banks as the most sought-after sector for income managers, and this is reflected in the recent outperformance of both oil majors."