Dividend growth is recovering in Europe, both within the Eurozone and in countries such as the U.K. and Switzerland. That payout growth should shine a light on exchange traded funds such as the First Trust STOXX European Select Dividend Index Fund (NYSEArca: FDD).
FDD slices the STOXX Europe 600 Index into a group of 31 components weighed by dividend yield, resulting in a 12-month trailing yield of 4.3% and a30-day SEC yield of 4.6%
In FDD, components are capped at a weight of 15% and weighted by dividend yield. Financials represent nearly 42.6% of FDD’s sector weight and that could prove to be a positive with U.K. and Swiss financial services firms expected to be some of Europe’s leading sources of dividend growth. French banks are also expected to boost payouts this year and France is FDD’s third-largest country weight at 11%.
With monetary policy easy throughout Europe, potential dividend stock investors should be aware that a prolonged deflationary environment could pose a serious problem as consumers hold off spending and industries see slower growth. On the other hand, low inflation would make fixed-income assets more attractive as bonds provide higher real yields. [ETF Ideas for the Dividend Boom]
The U.K. and Switzerland combine for over 63% of FDD’s geographic weight. Those are two of the premier ex-U.S. dividend growth destinations in the developed world. Increasing the allure of U.K. dividend stocks for U.S. income investors is that the U.K. does not withhold tax on payouts for foreign investors, meaning U.K. dividend taxation is comparable to what investors are accustomed to in the U.S.
Just as there is with U.S. large-caps, there are legitimate dividend growth stories with some U.K. companies, some of which are already familiar to investors on this side of the Atlantic. Investors can use exchange traded funds to access some of those names.
“There’s only one caveat: ECB President Mario Draghi has indicated that the European Central Bank might further weaken the Euro to stimulate growth. This might be balanced out by the strong Great British Pound Sterling and the Strong Swiss Franc. Also, the U.S. Federal Reserve Bank has also indicated that it might increase, slightly, its benchmark rate, hence creating a stronger dollar. This all might affect the fund’s yield by currency translation but, again, that greatly depends on the size of the Fed rate hike,” according to a Seeking Alpha analysis of FDD.
First Trust STOXX European Select Dividend Index Fund
