Standard Life Investments

Focused Insight

Europe driving global dividend growth - European equities

  • Strong yields from European companies
  • Putting a premium on stock selection
  • Dividends driving overall returns

European equities paid out the highest level of dividends for a number of years during the second quarter. However, geopolitical risks and continued economic weakness would seem to point to a slowdown in dividend growth in the months ahead. While it’s hard to argue with this, it’s important to remember the strong fundamental backdrop that exists for dividends in the region.

With a yield of around 3.3%, the European market yields significantly more than its US and UK peers, something that will continue to attract income investors as the low-yield environment persists. The attraction of European equities should be bolstered further by attractive relative valuations when compared to other developed markets. Furthermore, while those predicting a material slowdown in dividends can point to projected earnings growth for 2014 now being considerably lower than it was at the start of the year, the figure will still be better than it has been in recent years.

Of course Europe’s difficulties put a premium on stock selection and the ability to identify those companies strong enough to maintain or grow existing dividend ratios. Encouragingly, we continue to find interesting and underappreciated income ideas across the market. We have held Sampo Group, the Finnish non-life insurance company, for some time and it continues to deliver a high and sustainable dividend. The group’s property and injury business has just enjoyed its best six months on record due to favourable conditions in its core Nordic market. In the past five years, Sampo’s strong management team has focused on value creation and has delivered a compound annual dividend growth rate of 15%. While the largest forest fire in Sweden’s history will have an impact on upcoming results, we expect the company to continue to grow its dividend.

Meanwhile, Nokia may not seem the most obvious income stock. However, the company is transforming itself in the wake of the sale of its mobile handset business and now has a focus on maximising the value of its remaining networks, navigations and patents businesses. Since the disposal of its handset unit, Nokia has reinstated its dividend, paid a special dividend and is in the midst of a large share buyback programme. Nokia is not without its challenges but with a new CEO and greater clarity of focus, the outlook is better than it has been for some time.

Nokia and Sampo Group illustrate why, despite Europe’s obvious difficulties, the region remains fertile ground for equity income investors. Indeed, with a number of supportive factors still in place, dividends are likely to remain a critical driver of overall returns.

To listen to the current views of Will James, manager of the European Equity Income Fund, please register for our recent webcast here.