Investors rewarded by European dividend-paying stocks
European dividend-paying stocks have yielded returns significantly higher than the benchmark in 2014.
Investors with a high proportion of dividend-paying stocks have been rewarded for their strategy in 2014. After two years of lagging slightly behind, these stocks have done better than the general European stock market in 2014. For Peter Nielsen, chief portfolio manager at Danske Capital, who advises Danske Invest on its investments in European dividend-paying stocks, this is exactly as expected.
“Generally speaking, dividend-paying stocks carry slightly lower risk than stocks in general, but they can still give a reasonable return in the long term,” says Nielsen. “In 2012 and 2013, we properly emerged from the euro crisis with the strong support of the European Central Bank, which generally produced high returns in the stock markets. Dividend-paying stocks yielded slightly less than the market. In 2014, the positive trend slowed, the EU and the West fell out with Russia over Ukraine, and the growth in Europe was disappointing. This brought about another big fall in interest rates in Europe, and this, combined with the poor prospects for growth, created an environment in which dividend-paying stocks are doing especially well.”
Dividend element and strong companies
Nielsen explains that in both 2012 and 2013 dividend-paying stocks generated good returns, but that in 2014 this type of stock has overtaken the rest of the European stock market. While the broad MSCI Europe Index, inclusive of net dividends, produced a return of 6,62 pct. from the turn of the year to the end of August, Danske Invest’s Europe High Dividend Class A fund has given a return of 10,83 pct. in the same period. Nielsen stresses, however, that it is not just the dividend element that has ensured a strong 2014 for the fund; the return is also due to a good deal of positive news and very few disappointments among the companies in the portfolio.
As a rule of thumb, dividend-paying stocks do not generally perform quite as well as other types of stock in a strongly growing market, but, on the other hand, they do not decline quite as much during difficult periods for the markets. In 2008 during the financial crisis, for example, dividend-paying stocks in Europe fell less than the general European stock market. Thus, this type of stock usually gives less price fluctuation in the portfolio.
“Dividend-paying stocks are great for a lot of portfolios because many investors do not follow the market particularly closely, which means they benefit most from slightly less price fluctuation in the portfolio. In the long term, dividend-paying stocks still give a good, competitive return,” says Nielsen.
Two groups of dividend-paying stock
Nielsen divides dividend-paying stocks into two groups. The first group comprises companies with a stable business model, a reasonable level of debt and a very shareholder-friendly dividend policy that typically pay out a high proportion of their earnings in dividends. The second group comprises companies that have experienced problems resulting in a falling share price and, consequently, a high dividend in relation to the share price. Here, however, there is a big risk that the dividend will be reduced. When investing for Danske Invest’s Europe High Dividend Class A fund, Nielsen invests primarily in dividend-paying stocks from the first group because he believes this type of stock has greater long-term potential.
Europe generally has more stocks with a high dividend than other regions, including the USA, where stock buyback is more common and stocks are generally higher priced.
