European stocks have been struggling over the past year, but investors can remain engaged with the asset class while smoothing out some of the volatility associated with international markets by tapping dividend stocks and exchange traded funds such as the ProShares MSCI Europe Dividend Growers ETF (CBOE: EUDV).
EUDV can help investors access European equities with steady track records of rising payouts. EUDV follows the MSCI Emerging Markets Dividend Masters Index, which targets MSCI Emerging Market components that have increased dividend payments each year for at least seven consecutive years.
Over the past year, EUDV is down about 10.60%, but that is about 640 basis points less bad than the S&P Europe 350 Index. Importantly, Europe is home to some of the most dependable dividend growth markets in the world outside the U.S. Plus, the broader European economy appears steadier than many investors realize.
“At a more fundamental level, the signs are there that the tide is finally turning and the European market is shifting in favour of value investors,” according to Morningstar. “Eight years of outperformance by growth stocks has led to a de-rating in value stocks, even as growth stocks themselves have been re-rated. The result has been a deep divergence between the two.”
Evaluating EUDV ETF
EUDV holds 35 stocks, nearly 42% of which hail from the healthcare and consumer staples sectors. The U.K., one of the leading dividend growth markets outside the U.S., commands 40.53% of the fund’s geographic exposure while France and Switzerland combine for almost 23%.
Valuations still look attractive relative to domestic stocks. On a forward earnings basis, European stocks have gotten cheaper continually since 2015, and price-to-book value for the region shows European names trading at a multi-year discount to the U.S.
“But for value investors, the bear market conditions may finally have begun to lead a revival in sectors such as telecoms and utilities, which recently have outperformed growth areas,” according to Morningstar.
European financials, which account for almost 9% of EUDV’s weight, also offer some opportunity.
“We are positive on the financial services sector, which sold off heavily despite an improved regulatory outlook and stronger capital position. In 2019, it should benefit from a strengthening in the European economy and a rebound in investor confidence, which has fallen to low levels off the back of geo-political instability,” said Morningstar.
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