The last five years have done much to raise the dividend yield for European equities from its underwhelming longer-term average.
This greater abundance of yield is not solely a result of the fall in the valuation of European stocks (although this has played a part), moreover some of it is due to the greater recognition by companies of the enduring quality of dividends in providing a less volatile indicator of corporate financial health.
According to the Henderson Global Dividend Report, European dividends (ex UK) remain the second-largest dividend region (after the US), constituting roughly 22 per cent of total global dividends paid. This amounts to twice the total of UK dividends.
Aside from the size of the dividend pool being much bigger, there is also a greater depth in the universe of stocks to look at. At the end of January there were 92 large companies yielding more than 4 per cent within Europe, this compares to just 36 companies in the UK. This is reflected in much less income concentration within the top-10 dividend payers, whereby the contribution of 23 per cent within the European total is less than half the UK concentration.
For UK investors, consideration should be made for the benefits of diversification toward Europe, especially when there is no sacrifice of yield (and indeed a yield pick-up) in exploiting a wider opportunity set. Although investors should remain conscious of the currency risk of investing in euro-denominated assets, a risk that can be mitigated if a sterling hedged share class is used.
For investors eyeing up the opportunities in Europe, one fund to consider would be the BlackRock Continental European Income fund. This is a true stock-picking fund that is flexible in nature and operation that takes an active approach to dividend investing.
The fund is managed by the experienced Andreas Zoellinger and Alice Gaskell. With a universe of Continental European large and mid-cap securities greater than £1bn market capitalisation, they focus on identifying undervalued stocks with a high but secure yield, alongside ‘quality’ companies able to exhibit above-average dividend growth.
The managers blend these traits into a portfolio of 40-70 stocks to deliver an annual income target of 110 per cent of the FTSE All-World Developed Europe ExUK Index. This disciplined approach has so far delivered reliable and growing income without sacrificing capital growth for investors.
In addition, the fund has also experienced a slightly lower sensitivity to market movements by virtue of the ‘quality’ trait that is incorporated.
Within a low-growth environment, an income-focused investment strategy within Europe is likely to continue to reward investors. This is likely to remain true where dividends continue to contribute a greater proportion of the return achieved.
Ian Rees is head of research, multi-asset funds at Premier
