3 Great European Stocks for Dividend Investors
Our picks offer attractive yields and the potential for appreciation. We also suggest a European dividend ETF.
Uncertainty about the Greek debt crisis has weighed on European stocks recently, but if you’re an income-hungry investor, it is still a good idea to look across the pond for yield. The Stoxx Europe 600 index, a benchmark of small, midsize and large companies in Europe, yields a spiffy 3.5% today. Standard & Poor’s 500-stock index pays just 2.0%.
And the volatility caused by concerns that Greece might leave the European Union is overshadowing positive trends for the continent. During the first quarter, earnings per share in the Stoxx 600 rose 11% from the year before. Compare that with a decline of 5.6% for S&P 500 profits. Earnings should continue to expand in 2015, thanks to low energy prices, the weak euro (which makes European goods cheaper for foreign buyers) and policies put in place by the European Central Bank to spur economic growth.
Yet even if Europe’s economy doesn’t accelerate quickly, plenty of fuel exists to support dividends, says Ned Gray, comanager of the Delaware International Value Equity fund. “If the overall growth expectation is not what it used to be, companies don’t have to reinvest as much in the business,” he says. “More cash is available for payouts.”
Unfortunately for U.S. investors, the strong dollar tempers the value of those disbursements, which are paid in local currencies. A dividend of one euro is worth $1.12 today, down from $1.36 a year ago. In many countries, you’ll also owe foreign taxes on the distributions you receive. Uncle Sam allows you to offset some or all of the taxes by claiming a credit or a deduction, but only if you hold the stock in a taxable account. You get no such break for stocks in tax-advantaged savings vehicles, such as individual retirement accounts.
Given these extra hurdles, make sure you choose foreign companies that not only sport attractive yields but also have the ability to increase those disbursements over time. You also don’t want to overpay. Despite the uncertainty about Greece, the Stoxx 600 has gained 18.8% this year in local currency terms, making some stocks look expensive (it has risen 10.1% in dollar terms). But the following stocks, all of which are available as American depository receipts, are still attractively priced, with solid dividends to boot. (Share prices, yields and returns are as of June 23)
Gray likes France’s Sanofi (symbol SNY, $51.2, yield 3.3%), one of many European drugmakers that pay dividends. The company makes treatments for diseases such as diabetes and multiple sclerosis, as well as vaccines and animal health products. Generic drug competition and the loss of a key patent have caused sales of Sanofi’s diabetes drugs to decline. But the firm is reloading its drug pipeline, including treatments created by Genzyme, a biotech company Sanofi bought in 2011. Analysts expect profits (in dollars) to decline by 8.4% in 2015, to $3.16 per share, but to inch up to $3.20 per share in 2016. Meanwhile, the stock trades at just 16 times estimated 2015 profits, compared with an average of 18 for global pharmaceutical makers. Sanofi has raised its dividend at an annualized rate of 7.3% over the past 10 years.
As in the U.S., European telecom companies tend to offer generous dividends. Ben Kirby, comanager of the Thornburg Investment Income Builder fund, says Vodafone Group (VOD, $37.8, 6.4%) is an attractive option. Compared with the U.S., which has only a handful of major telecom players, the European market has dozens of network operators. “It’s just too fragmented,” Kirby says. That spells opportunity for London-based Vofadone. In 2013, the company sold its stake in Verizon Wireless to Verizon Communications for $130 billion and has been using the cash to upgrade its network. Vodafone has also been making acquisitions, including Kabel Deutschland Holding, a German cable company, in 2013, and Grupo Corporativo Ono, a Spanish cable operator, in 2014. And this month, Vodafone confirmed that it is in talks with Liberty Global, a European cable company, about the possibility of swapping certain assets in Europe. If a deal is made, Kirby believes Vodafone could increase revenues and realize cost savings. Vodafone has increased its dividend an annualized 8.8% since 2010. As an added bonus, the U.K. does not withhold taxes on dividends for U.S. investors.
Kirby is also optimistic about European banks. The sector has built up cash reserves to meet stricter regulatory requirements since the financial crisis. With those reserves in place and loan demand still limited in Europe, banks are free to return cash to shareholders. “We are pretty optimistic about the sector growing its dividends,” Kirby says. Among his picks: Swiss bank UBS Group (UBS, $21.9, 2.5%), which nearly doubled its dividend last year. UBS’s investment advisory business is thriving, too. During the first quarter—a period of heightened volatility during which the Swiss franc was unpegged from the euro and the Swiss National Bank introduced negative interest rates—the unit earned 1.1 billion Swiss francs (roughly $1.2 billion), its highest profits since 2008. “Volatility drives more transactions, and the banks capture commissions from that,” Kirby says. Analysts expect UBS to generate earnings growth of 36.4% in 2015, to $1.35 per share. The stock trades at 1.4 times its 2015 estimated book value (assets minus liabilities). Historically, UBS has traded at more than two times book value, Kirby says.
If you don’t want to buy individual stocks, consider PowerShares International Dividend Achievers Portfolio (PID). The exchange-traded fund invests in stocks of companies incorporated outside of the U.S. that have raised dividends for at least five consecutive years, including Sanofi and Vodafone. Europe accounts for 46% of the holdings, with the balance made up mostly of North American and Asian stocks. The global exposure has dragged down performance recently. Over the past year, International Dividend returned just 3.0%. But longer term, the ETF has excelled, delivering 9.1% annualized over the past five years, compared with 8.5% for the average large-company foreign stock fund, according to Morningstar. The fund, which charges 0.54% in annual fees, yields a healthy 3.2%.