The European Central Bank has been implementing a loose monetary policy that dragged yields down to record lows. Consequently, dividend-paying European stocks and related exchange traded funds may strengthen as more investors turn to riskier assets.
The cash reward for owning European stocks is seven times bigger than for bonds, report Sofia Horta E Costa and Roxana Zega for Bloomberg.
The Euro Stoxx 50 dividend yield is about 4.3%, whereas the Bloomberg Eurozone Sovereign Bond Index shows a 0.6% yield, and one-third of the bonds offer negative yields.
The yield disparity between European stocks and bonds has been widening as recent global uncertainty pushed investors out of the equities market and into safe-haven fixed-income assets.
“The gap between bond and dividend yields will continue expanding,” Simon Wiersma of ING Groep NV told Bloomberg. “Investors fear economic growth figures. We’re still looking for some confirmations for the economic growth outlook.”
Moreover, with ECB President Mario Draghi hinting at more stimulus on the way, traders have piled into the debt market, pushing down yields.
However, given the depressed yields in the fixed-income market, Francois Savary, chief investment officer at Prime Partners, argues that there are plenty of bargains to be had in higher yield-generating assets.