Equity markets in some developed Europe have performed very well so far this year compared to the U.S. market. Stocks in a few of the hard-hit economies of the recent past have rebounded sharply. For example, the year-to-date price returns of the MSCI index for Ireland, Italy, Portugal are 11.1%, 10.95% and 7.44% respectively. The MSCI index for Spain is up by just over 6% YTD. Compared to these returns, the MSCI USA index is basically flat YTD. Most of the other developed European MSCI indices have also performed relatively better than the U.S. Despite the overall better performance, developed Europe stocks have still more room to grow in order to catch-up with their U.S. peers. An article in The Wall Street Journal late last month discussed the reasons on why developed European stocks may finally catch-up with U.S. stocks.

From the article:

European indexes’ heavy weighting in beaten-down banks and the U.S.’s concentration in highflying tech stocks has led to markets whose values contrast sharply, according to one key measure. The 10-year cyclically adjusted price/earnings ratio for U.S. equities is currently around 25 times, compared with 16 times for those in the euro zone, according to Mr. Higgins. In December 2006, just ahead of the financial crisis, both were at around 27 times.

But with European banks’ balance sheets on their way to being cleaned up and U.S. techs looking expensive by some measures, the different sector weightings tilt the odds for gains back toward Europe, BSC’s Mr. Shing says.

At the same time, the European economy is looking more competitive.

Europeans “are now willing to take jobs at less than they were willing to work for three or four years ago, in some cases 30% to 40% less,” said Mr. Browne, pointing to Europe’s high unemployment rates and big drops in wages in some countries.

By contrast, U.S. wages are rising, even after inflation, and a shrinking labor force is putting upward pressure on costs, he added.

Source: Stocks in Europe Look to Even the Score Versus U.S. Counterparts,  The Wall Street Journal, March 31, 2014

The following chart shows the 5-year performance of the MSCI Europe and US indices:

Click to enlarge

Source: MSCI

One of the key points noted in the journal article is the difference in the MSCI index for developed Europe and the U.S. Financials account for 22.45% in the Europe index compared to just 14.5% for the U.S. index as of March 31, 2014. Due to the high concentration of financials, European markets suffered heavily when financials tanked hard during the past few years as crisis after crisis battered Europe. As European banks have stabilized and are increasingly getting back to normal slowly, the overall equity market should benefit. On the other hand U.S. bank stocks have already had a great run last year and may be range-bound this year. 

Similarly the tech sector has a heavy concentration in the MSCI US index with a weighting of 20.5%. The developed Europe index has an allocation of just over 3% for this sector. So when tech stocks soared last year the US index benefited disproportionately relative to the Europe index. The current downtrend in US tech stocks does not bode well for the MSCI index returns.

The dividend yield of the MSCI Europe index is 3.26% and the P/B ratio is 1.82. The corresponding U.S. index values are 2.00% and 2.31%.

Hence investors looking to diversify can add European stocks in a phased manner by taking advantage of the current volatile market conditions. As history has proven many times the same market may not be the top performing market year after after.So US stocks may not outperform their European peers again this year.

The Top Ten Constituents in the MSCI Europe index are listed below with their current dividend yields:

1.Company: Nestle SA (NSRGY)
Current Dividend Yield: 3.18%
Sector: Food Products
Country: Switzerland

2.Company: Roche Holding AG (RHHBY)
Current Dividend Yield: 2.68%
Sector: Healthcare
Country: Switzerland

3.Company: Novartis AG (NVS)
Current Dividend Yield: 2.17%
Sector: Energy
Country: Switzerland

4.Company: Total SA (TOT)
Current Dividend Yield: 5.13%
Sector: Energy
Country: France

5.Company: HSBC Holdings PLC (HBC)
Current Dividend Yield: 4.74%
Sector: Banking
Country: UK

6.Company: GlaxoSmithKline (GSK)
Current Dividend Yield:
Sector: Healthcare
Country: UK

7.Company: Sanofi (SNY)
Current Dividend Yield: 3.12%
Sector: Pharmaceuticals
Country: France

8.Company: Royal Dutch Shell-A(RDS.A)
Current Dividend Yield: 4.17%
Sector: Energy
Country: UK

9.Company: Bayer (BAYRY)
Current Dividend Yield: 2.23%
Sector: Pharmaceuticals
Country: Germany

10.Company: BP PLC (BP)
Current Dividend Yield: 4.67%
Sector: Energy
Country: UK

Note: Dividend yields noted above are as of Apr 15, 2014. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: No Positions

Income investors looking for add dividend stocks to their portfolios can find plenty of attractive opportunities in Europe.Unlike U.S. companies European firms have traditionally paid out a large portion of their earnings to shareholders in dividends. While American stocks pay dividends quarterly most European stocks generally pay dividends only twice a year – an interim and a final dividend. It is incorrect to assume that simply because European companies pay dividends only twice a year they are worse than American companies. In fact, exactly the opposite is true. Not only most European firms have higher payout but also have higher dividend yields than their American peers. For example the current dividend yield on the S&P 500 is about 2.3%. It has stayed in the 2% for many years despite soaring corporate profits. Compared to the S&P’s low dividend yields, the latest dividend yields of select European markets are shown below:

• Austria: 2.8%
• France: 3.0%
• Germany: 2.5%
• Spain: 3.7%
• Sweden: 3.5%
• UK: 3.2%

Source: FT Market Data, The Financial Times

American companies used to have a strong dividend culture many decades ago when they rewarded shareholders with high and consistent dividends. Investors at that time invested in equities more for earning periodic income as opposed to price appreciation. However all that changed with the advent of stock options, investor’s attraction for stock price appreciation, Uncle Sam’s preferential tax policies for capital gains, glorification of CEOs who boost their company stock prices by any means necessary, explosive growth in trading volumes, the proliferation of hedge funds, corporate culture of short-term thinking, get-rich quick mentality of even retail investors, etc.

Note: In this post I have not addressed the issue of withholding taxes on European stock dividends for U.S. investors. However it is possible to earn superior returns with European equities even with the withholding taxes.

In contrast, European companies are not affected by most of the ills that plague U.S. companies and investors alike. As an example, some French companies pay long-term shareholders a “loyalty dividend” in addition to the regular dividends since they want to appreciate investors who hold on to their stock for a long time. American companies do not have such thinking. Even if they wanted to U.S. executives cannot implement “loyalty dividend” policies since many large institutional investors are themselves short-term traders and would not support such management proposal. Moreover the concept of “groupthink” also affects American companies heavily since any deviation from standards in the corporate world is considered too risky.

As we discussed above, the dividend policies of European firms are share-holder friendly. The following chart shows the contribution of dividends and stock price gains to total returns across regions:

Click to enlarge

The graph below shows the comparison of dividend payout ratios of European firms to their American peers:

Source: Dividend strategies in times of financial repression, Alliance Global Investors

The EURO STOXX Select Dividend 30 Index is comprised of high dividend-yielding companies across 12 Eurozone countries. Ten constituents of this index are listed below with their ADR ticker and current dividend yields for further research:

1.Company: Allianz SE (AZSEY)
Current Dividend Yield: 4.36%
Sector:Insurance

2.Company: BASF SE (BASFY)
Current Dividend Yield: 2.44%
Sector: Chemicals

3.Company: AXA Group (AXAHY)
Current Dividend Yield: 4.22%
Sector: Insurance

4.Company: Banco Santander SA (SAN)
Current Dividend Yield: 8.39%
Sector: Banking

5.Company: Edp Energias De Portugal SA (EDPFY)
Current Dividend Yield: 3.37%
Sector:  Electric Utilities

6.Company: Orange (ORAN)
Current Dividend Yield: 2.24%
Sector: Telecom

7.Company: Total SA (TOT)
Current Dividend Yield: 4.17%
Sector:Oil, Gas & Consumable Fuels

8. Company: Eni SpA (E)
Current Dividend : 4.62%
Sector:Oil, Gas & Consumable Fuels

9.Company: Unilever NV(UN)
Current Dividend Yield: 2.97%
Sector: Food Products

10.Company: Wolters Kluwer NV (WTKWY)
Current Dividend Yield: 3.20%
Sector: Media

Note: Dividend yields noted above are as of Apr 4, 2014. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long SAN, AXAHY

Dividend-paying stocks are a favorite for many investors. These stocks have become attractive for many years now as U.S. investors look for decent yields on their investment especially in this ultra-low interest environment when other investments such as bank Certificate of Deposits (CDs) practically earn 0% or very low interest. Dividend stocks are suitable for all investors to hold for the long-term for a multitude of reasons.For example, a retired senior citizen can hold these stocks to earn a quarterly or monthly income which will supplement social security, pension and other sources of income. Young investors may chose dividend stocks in order to build a sizable retirement nest egg since they can wait out market ups and downs. These stocks are perfect such investors since dividend growth and reinvestment of dividends can amplify their returns over many years till they retire. Regardless of the investor type, one important reason why investors  choose dividend stocks is to keep up with inflation. Put another way, the return on investment should be high enough to at least equal or beat inflation. High inflation rates can easily eat way most if not all of the returns from an equity investment. So if the inflation rate is at 2% investors try to earn at least 2% or more to make their investment worthwhile.

Some investors may wonder whether dividend stocks are good to hold during periods of inflation and deflation. The past performance of these stocks during such periods reveal that indeed dividend stocks outperform during periods of both inflation and deflation according to a research report by Alliance Global Investors.

From the report:

A look at the US since 1950 shows that, here too, dividend strategies have outperformed the wider market in times of both rising inflation (up to 10 %) and deflation (see Chart 5). This is really quite interesting since inflating the economy as part of a financial repression regime can be one effective means of reducing the huge debt in the industrialised world, in addition to consolidating national budgets and growth.

Click to enlarge

Source: Dividend strategies in times of financial repression, Alliance Global Investors

Hence dividend stocks can beat the overall market in terms of returns during inflation and deflation. Since deflation is highly unlikely in the U.S. for the foreseeable future and prices of goods and services are more likely to increase year after year the case for dividend stocks cannot be overstated. While in the past basic essentials such as food and utilities used to remain stable, in recent years the prices of pretty much everything has gone up and Americans have been forced to endure atrocious price increases in healthcare, college tuition, etc. It can argued that the economic policies of this country have been disastrous for the majority of average workers since real wages have barely moved higher in the past few decades but the prices of goods and services have soared higher on a consistent basis. So adding dividend stocks to a well-diversified portfolio can help mitigate some of the adverse effects of inflation.

One way to identify dividend stocks for long-term investment is to refer to the S&P 500 Dividend Aristocrats index. It is comprised of S&P 500 companies that have increased dividends every year for the last 25 consecutive years.

Ten stocks from the S&P 500 Dividend Aristocrats index are listed below for consideration:

1.Company: AT&T Inc (T)
Current Dividend Yield: 5.25%
Sector: Telecom

2.Company: Kimberly-Clark Corp (KMB)
Current Dividend Yield: 3.06%
Sector: Household Products

3.Company:The Clorox Co (CLX)
Current Dividend Yield: 3.42%
Sector:Household Products

4.Company:Colgate-Palmolive Co (CL)
Current Dividend Yield: 2.25%
Sector: Household Products

5. Company: PPG Industries Inc (PPG)
Current Dividend Yield: 1.28%
Sector: Chemicals

6.Company:Procter & Gamble Co (PG)
Current Dividend Yield: 3.08%
Sector: Household Products

7.Company: Abbott Laboratories(ABT)
Current Dividend Yield: 2.30%
Sector: Pharmaceuticals

8.Company: Johnson & Johnson (JNJ)
Current Dividend Yield: 2.71%
Sector: Pharmaceuticals

9.Company: T. Rowe Price Group Inc (TROW)
Current Dividend Yield: 2.16%
Sector: Investment Management

10.Company: The Coca-Cola Co (KO)
Current Dividend Yield: 3.13%
Sector:Beverages

Note: Dividend yields noted above are as of Apr 4, 2014. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: No Positions

The S&P 500 and the Dow Jones index closed at 16412 and 1865 respectively yesterday. The S&P 500 soared by 30% in 2013 and is flat so far this year. The index has had a spectacular run since the lows reached during the global financial crisis in early 2009.

Here is a chart showing the current bull market in perspective from Deutsche Bank’s US Equity Insights report. The return shown is through March 9, 2014 :

Click to enlarge

The chart below shows the duration of bull markets:

Source: US Equity Insights, Deutsche Bank, March 9, 2014

Related ETF:

• SPDR S&P 500 ETF (SPY)

Disclosure: No Positions