Dividend Income ETFs: ‘European high-yield equities are an attractive portfolio addition’

Feb 6th, 2012 | By | Category: Equities

In the current market environment of low interest rates and negative real yields for gilts, treasuries and bunds, investors should seriously consider dividend stocks.  European companies, in particular, pay out a larger share of their profits than other regions, according to new research from Allianz Global Investors.

Dividend Income ETFs: European high-yield equities are an attractive portfolio addition

High-yield equities, especially those of European companies, are an attractive portfolio addition, say Allianz Global Investors.

Due to the price decline in equity markets the average dividend yield of European stocks has risen to 4.2% (as of 31/12/2011). In comparison, US dividend yields amount to only about 2.2% and the average in Asia Pacific is 3.5%.

The research “Dividend stocks – an attractive addition to a portfolio” demonstrates the performance contribution of dividends – with the proviso of course that past performance may change in the future.

If an investor had made a single investment of €100 in stocks in the MSCI Europe in 1970 and reinvested the dividend payments annually, they would have an investment of €4,676 (before tax) at the end of 2011, highlights Dennis Nacken from the AllianzGI Capital Market Analysis Team.

Without the effect of the annually reinvested dividends, the portfolio would have only grown to €1,027.  So, roughly 43% of the total annualised earnings of the equity investment over this period came from the dividend payments.

Neil Dwane, manager of the Allianz RCM European Equity Income Fund, says, “We believe that an equity dividend strategy that focuses on high-dividend companies should offer investors an attractive coupon, especially in today’s low interest rate environment.”

FEATURED FUNDS

iShares EURO STOXX Select Dividend 30 ETF

Amundi MSCI Europe High Dividend ETF

Amundi MSCI EMU High Dividend ETF

Lyxor EURO STOXX 50 Dividends ETF

ETFlab DAXplus Maximum Dividend ETF

PowerShares FTSE RAFI Europe ETF

The research reveals that another advantage of high dividend stocks is that dividend payments tend to be steadier than corporate profits.  A comparison of dividend payments and profits of the companies listed in the MSCI Europe shows that corporate profits were much more volatile during the past 30 years.  Dividend stocks have also tended to be subject to smaller price movements than the overall market in the past.

The study demonstrates that an investment strategy based on high dividend stocks usually paid off for investors during the last few years, particularly in the euro area.  While the broader equity market was up only marginally (0.1% per annum) since the end of 1998, investors in the Euro Stoxx Select Dividend 30 Index would have obtained an annualised return of 6.9%.  These higher returns were also achieved with slightly lower risks measured against market price fluctuations.

Neil Dwane concludes: “We believe that dividend strategies are set for a comeback.  Average equity market returns are likely to be lower than the long-term average in coming years, highlighting the increasing role dividends will play as part of total equity market returns.”

For investors seeking exposure to high-yielding European equities specifically via ETFs, there are a number of funds worth considering. These include funds from iShares, Lyxor, Amundi and Invesco Powershares.

iShares EURO STOXX Select Dividend 30 ETF
The iShares EURO STOXX Select Dividend 30 ETF tracks the highest dividend-yielding companies in the 12 eurozone countries. Only companies that have a non-negative historical five-year dividend-per-share growth rate and a dividend to earnings-per-share ratio of less than or equal to 60% are included.

(N.B. Deutsche Bank X-Trackers, ComStage and Source also offer ETFs tracking the EURO STOXX Select Dividend 30 Index)

Amundi MSCI Europe High Dividend ETF
The Amundi MSCI Europe High Dividend ETF tracks the MSCI Europe High Dividend Yield Strategy Index. This provides access to the 100 or so leading stocks in 16 European countries having the highest dividend rates in their respective countries.

Amundi MSCI EMU High Dividend ETF
The Amundi MSCI EMU High Dividend ETF tracks the MSCI EMU High Dividend Yield Strategy Index. This provides access to the 70 or so leading stocks in 11 countries of the European Economic and Monetary Union that have the highest dividend rates in their respective countries.

Lyxor EURO STOXX 50 Dividends ETF
The Lyxor EURO STOXX 50 Dividends ETF is designed to benefit from the characteristics of the dividends cycle and the dividends market. The index it tracks is composed of five EURO STOXX 50 Index Dividend futures, giving long term exposure to dividends as an asset class. EURO STOXX 50 Index Dividend futures enable investors to take a position on the cumulative realised dividends that will be paid on a yearly basis by all the stocks comprised in the EURO STOXX 50 Index.

ETFlab DAXplus Maximum Dividend ETF
The ETFlab DAXplus Maximum Dividend ETF tracks the performance of the DAXplus Maximum Dividend Index. Only German equities with the highest dividend yield forecast qualify for the index. The maximum number of equities in the index is limited to 20.

PowerShares FTSE RAFI Europe ETF
Though not a specific dividend ETF, the PowerShares FTSE RAFI Europe ETF typically offers a higher yield and has a strong track record. The fund tracks the performance of the largest European equities, selected based on the following four fundamental measures of firm size: book value, income, sales and dividends. The equities with the highest fundamental strength are weighted by their fundamental scores.

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