Recently Treasury bond prices have soared, pushing down their yields to near-record lows. With bond yields falling, dividend stocks are looking more and more attractive to income-hungry investors.
Long Investment Horizons for European Countries
For the majority of countries, stocks did not provide consistently positive real return over the long run. Historically, investors needed to hold equities for 20 to 30 years to be assured of positive returns in British, Dutch, Irish, Swedish and Swiss markets. French, German and Spanish investors would have required an investment horizon of 50-60 years to be sure of a positive real return; Belgian and Italian investors would have needed an investment horizon of more than 70 years, according to researcher Elroy Dimson.
Fear in Europe Created Bargains
There has been a lot of anxiety over the sovereign debt crisis in Europe over the last few weeks. Many European companies have seen huge sell-offs, despite their strong balance sheets and cash flows. The following chart shows that the price of Vanguard's European ETF (VGK) has tumbled 15% since the beginning of the year.
Click to enlarge:
Europe Dividend Aristocrats
The S&P Europe 350 Dividend Aristocrats is designed to measure the performance of S&P Europe 350 index that has consistently increased dividends every year for at least 10 consecutive years. There are 35 companies in this list. These hard-hit European dividend stocks have seen their yields increase substantially recently. Two of them are traded on the NYSE: Novartis AG (NVS) and National Grid Transco (NGG). Both have forward P/Es of only 10.
10 Main European Related ETFs (by Net Assets)
Since the majority of Europe Dividend Aristocrats are not traded on the U.S. exchanges, the other choice for retail investors are European-related ETFs. Followings are the top 10:
Fund Name (Ticker)
iShares MSCI EAFE Index (EFA)
Vanguard Europe Pacific ETF (VEA)
Vanguard European ETF (VGK)
iShares S&P Europe 350 Index (IEV)
iShares MSCI EMU Index (EZU)
SPDR S&P Emerging Europe (GUR)
SPDR DJ EURO STOXX 50 (FEZ)
SPDR DJ STOXX 50 (FEU)
WisdomTree Europe SmallCap Div (DFE)
WisdomTree Europe Total Dividend (DEB)
Top European Countries in MSCI EAFE Index Fund (EFA)
EFA includes stocks from Europe, Australasia and the Far East. Followings are the top 8 European countries inside EFA. They account for more than 57% of EFA holdings:
United Kingdom (EWU)
In today’s rapidly changing environment, a tactical investor needs to adjust asset allocations based on current conditions. On the one hand, there are one hundred reasons to switch into 100% cash. On the other hand, the S&P 500's index fair and achievable value over the next 6 to 12 months could be 1,25. Given this directionless markets, dividend-paying stocks are clearly a better choice because they are less volatile than stocks without dividends and they provide an extra cushion in falling markets.
A strong company may go under or suspend its dividend due to unexpected events, like BP (BP). A basket of continental stocks doesn’t have that kind of risk. With European ETFs, you could receive a steady income stream that is competitive with investing in 10-year-treasuries.
Disclosure: Long EFA. Data is from iShares and Yahoo Finance and is valid as of June 13, 2010.