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.
“If you believe that we’ll avoid a global recession and that fears about deflation are overdone, there’s a lot of attractively-priced assets out there,” Savary told Bloomberg. “There’s growing interest in the higher-yielding assets now.”
ETF investors can also capture the potential growth in European dividend stocks also have a number of options to choose from. For instance, the First Trust STOXX European Select Dividend Index Fund (NYSEArca: FDD) and WisdomTree Europe Quality Dividend Growth Fund (NYSEArca: EUDG) capture large dividend-paying European companies, and the WisdomTree Europe SmallCap Dividend Fund (NYSEArca: DFE) follows small-cap Europe dividend stock exposure. FDD has a 4.56% 12-month yield, EUDG has a 2.22% 12-month yield and DFE has a 2.98% 12-month yield.
The ProShares MSCI Europe Dividend Growers ETF (NYSEArca: EUDV) reflects the performance of the MSCI Europe Dividend Masters Index, which consists of at least 25 European companies that have consistently increased their dividends for at least 10 consecutive years. EUDV has a 1.88% 30-day SEC yield.
The O’Shares FTSE Europe Quality Dividend ETF (NYSEArca: OEUR) tracks the FTSE Europe Qual / Vol / Yield Factor 5% Capped Index, and O’Shares FTSE Europe Quality Dividend Hedged ETF (NYSEArca: OEUH) provides a currency-hedged version of OEUR.
Investors worried about continued devaluation in the euro currency as the ECB ramps up its accommodative measures may also consider the Deutsche X-trackers MSCI Eurozone High Dividend Yield Hedged Equity ETF (NYSEArca: HDEZ).
Furthermore, investors may take to the riskier real estate investment trusts segment across European markets as an attractive yield-generating opportunity with the iShares Europe Developed Real Estate ETF (NYSEArca: IFEU), which tracks European real estate stocks and real estate investment trusts. IFEU has a 3.67% 12-month yield.
Max Chen contributed to this article.