Importantly, valuations on European dividend shares are also extremely attractive relative to other income playing asset classes. 70% of European companies today have a dividend yield greater than what their own corporate bonds are yielding! This compares to a historical long run average of just 18%. In other words, there is a huge valuation mismatch with bonds being very expensive relative to equities. It also means debt financing for European corporates remains attractively cheap.
Buckingham notes that stock selection is critical for European dividend investors. For example, many of the best stocks are found outside of the traditional equity income sectors. He systematically looks across the universe of high yielding stocks to pick those with the best yield and growth prospects, irrespective of sector. With selective exceptions, he’s avoiding traditional ‘bond proxy’ sectors like beverage companies and utilities, which he thinks look overbought, and instead is finding that cyclical sectors such as financials and media render some of the most interesting opportunities.
He cites the European automotive companies Daimler and Michelin as stocks that tick multiple boxes. Both are significant beneficiaries of weaker oil prices, which help to bring down the running costs on cars, making them more attractive to prospective buyers. Both also have dollar linked revenues but a euro cost basis, helping them benefit from lower currency. They should also be beneficiaries of rebounding European consumer confidence helping auto sales.
Buckingham cites Easyjet as another income pick that benefits from lower oil input costs and rising consumer confidence.
Financial services have been a fertile income hunting ground for Buckingham, as Intesa Sanpaolo and ING are among his favoured holdings. He notes that both have undergone major restructuring and now offer attractive dividend policies.
In concentrating on the highest yielding 30% of the European equities market, Buckingham also importantly avoids yield traps that may underperform. Where he does hold selective companies in more traditionally defensive sectors, Buckingham looks for strong profitability and growth prospects. A typical holding he cites is Belgacom, Belgium’s largest telecommunications company. He sees the 4.3% dividend yield as fundamentally sound and strong upside for the company based on the limited smartphone penetration in Belgium relative to other European countries.