There’s a lot to like about European equities, but for investors who were previously lured into the asset class only to be left disappointed, a more restrained, income-based approach could merit consideration.
The SmartETFs Dividend Builder ETF (DIVS) checks those boxes. DIVS, formerly an actively-managed mutual fund, is a global exchange traded fund featuring exposure to 10 countries. Adding a layer of safety for investors pondering the veracity of the European economic recovery, the fund allocates 47% of its weight to domestic equities.
However, DIVS offers enough Europe exposure to make it a conservative play on the region’s higher yields and rebounding payouts.
“The MSCI Europe Index has returned about 15% this year as of June 30, dividends included, about the same as the S&P 500 index’s performance. The European index was recently yielding about 2.5%, versus 1.4% for the S&P 500,” reports Lawrence Strauss for Barron’s.
DIVS Means Dividends
The ETF’s European exposure centers around six countries – the U.K., Switzerland, France, Germany, Denmark, and Ireland. Those countries combine for 42% of the fund’s geographic exposure.
In the case of the U.K., which is usually one of the largest dividend destinations on the continent, payouts were punished last year due to the coronavirus pandemic. However, the U.K. dividend outlook is brightening in considerable fashion due to a rebounding economy, soaring mining shares, and regulators removing the restraints for dividend increases by banking and insurance firms.
Last year, the country endured wide-ranging bans designed “to prevent them (banks and insurance companies) from paying dividends, enacted by regulators including the European Central Bank and the Bank of England,” according to Barron’s.
Switzerland, the third-largest country weight in DIVS, is supported by its status as a high-quality market. Thanks in part to strong balance sheets at large cap pharmaceuticals companies, payouts there grew in the first half of the year.
Beyond Switzerland and the U.K., European dividends have a longer runway for growth to play catch-up with the S&P 500.
“Still, compared with U.S. companies, European firms had a much deeper hole to dig out of in terms of dividend cuts last year. Plenty of U.S. companies cut or suspended their payouts, but S&P 500 dividend payments rose about 1% last year versus 2019 levels,” continues Barron’s.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.