13 dividend stocks among best in Europe
1st November 2016 13:27
Serious long-term investors understand the importance of dividend income; it's enhanced returns in Europe by almost 40% since 2007. And a dividend yield here of 3.7% - a fifth higher than the 30-year average - should offset anaemic profit growth and attract back overseas investors put off by political uncertainty, argues one expert.
"Income scarcity remains an issue," writes UBS strategist Karen Olney. "Over the past two decades, Developed World 10-year bond yields have fallen by 85% from over 6% to 0.8%, with 75% of these bonds paying a yield of less than 1%.
"While faith is low given the absence of profit growth, European dividends are the only asset class [of those surveyed] to offer a yield above their 30-year average of 3.1% and one higher than competing asset classes. We think it is worth digging deeper."
A key question for investors, given total net profits are 30% below 2007 levels, is whether companies can afford to maintain dividends. "We think so," says Olney. Dividend per share is only one-quarter as volatile as earnings per share (EPS) since 1970 and is more predictable.
Strip out the energy sector, and the payout ratio falls to 63%, less than in the early 1990s and the recession in 2003 where follow-on dividend cuts averaged only 10%.
Don't expect any major impact on dividends following US interest rate hikes, either, says UBS. The broker's stats show the performance of investing in high dividends was not de-railed when the Fed last started hiking. It argues that a forward yield of 3.7% is already priced for disruption, and that income–paying financials do well when rates rise.
Using its own criteria, UBS has picked its 35 top stocks for dividend income. It avoids the top decile of yields, which often trade like distressed assets and tend to fair badly during corrections, avoids a sector bias, and focusses on value.
The outcome is a portfolio yielding 4.8% and a dividend compound annual growth rate (CAGR) of 7% out to 2019.
Of the 35, 13 are listed in the UK, although dual-listed
also gets a mention.is top of the pile, yielding 9.6% based on estimates for 2017, although UBS does admit that housebuilding may not be the highest quality sector right now.
Oil major
gets the nod over rival . "Delivery of cost savings, disposal program, and synergies from BG merger are supportive of strong free cash flow generation," argues Olney. "We forecast a return to full-cash dividend payments by second-half 2017."is the next London player at 12th on the UBS list. Currently yielding around 6%, the telecoms giant's payout is now covered by an equity free cash flow (EFCF) yield in calendar 2017 of 7.5%, rising to 9.5% a year later.
Drug titans
and aren't far behind. Each yield around 5% and, while divided growth is off the cards, there is little chance of a cut. For Glaxo, strong EPS growth and improving dividend cover means the 80p dividend "may well represent a floor".still features despite a high-profile divided cut earlier this year. We know that $1.10 per share is a minimum payout for 2016, but there's more flexibility next year and about 50% of earnings will be handed back to shareholders. "Given where commodity prices are today and the strength of Rio's balance sheet, the likelihood is that they will increase the dividend in 2017," writes UBS.
It's a "polarised name", but the broker thinks investors have underestimated operational gearing at the company. It believes
could drive EPS up by 15% a year if it generates targeted top line growth of 5-7%."Sky has historically grown dividend per share (DPS) in-line with EPS, but dividend cover has come down to 1.7 times following the Sky Europe deal, meaning we expect modest growth in DPS near-term, but a ramp in growth once cover builds back to 2 times."
Elsewhere, tobacco kings
and are in, as are , , and .This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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