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I know some will consider it naive of me to recommend anything European right now. Don't most of us believe that Europe is going to collapse under the insurmountable weight of sovereign debt issues? Will not the contagion then spread like an out of control forest fire that will ultimately leave us with nothing more than a vast wasteland of scorched earth? Won't all of the current European political theatrics at best postpone the inevitable? Although these fears are by no means completely unfounded, I do believe they are overblown as they relate to European stocks.

Valuation

First, why should you even consider European stocks? Well, quite simply because they are cheap. Earnings are 25% to 30% cheaper than U.S. stocks, with a trailing PE of 11 and forward PE of 10 for the MSCI Europe Index. European companies are also more willing to share their earnings with stockholders in the form of dividends. You get more than twice the yield with the Vanguard European Stock ETF (NYSEARCA:VGK) which has a 4.39% yield compared to only 1.96% for the SPDR S&P 500 Trust ETF (NYSEARCA:SPY).

Foreign Tax Credit - Discount the Dividends

I do discount dividends from Europe because of the withholding taxes. I realize that most investors believe that you will end up getting the money back via the Foreign Tax Credit. However, if you are like me and the tens of millions of other Americans that fall prey to the Alternative Minimum Tax each year, you are not able to take the credit. On my Vanguard European Stock ETF, I basically paid an additional 10% tax to European countries on my dividends that I was not able to recapture on my U.S. tax return.

Source: MSCI, Yahoo!Finance

European Stocks or Multinational Corporations?

When it comes to large multinational corporations, it is becoming less important where the company has its headquarters (unless the hosting country is communist or politically unstable). Instead, we should generally be more focused on where the company is deriving its revenues. Consider the following top ten companies of the MSCI Europe Index which make up more than 20% of the index:

RankHoldings
1Royal Dutch Shell PLC (NYSE:RDS.A)
2Nestle SA (OTCPK:NSRGY)
3HSBC Holdings PLC (HBC)
4BP PLC (NYSE:BP)
5Vodafone Group PLC (NASDAQ:VOD)
6Novartis AG (NYSE:NVS)
7Roche Holding AG (OTCPK:RHHBF)
8GlaxoSmithKline PLC (NYSE:GSK)
9Total SA (NYSE:TOT)
10British American Tobacco PLC (NYSEMKT:BTI)

These companies do business all over the world. In fact, a sizable minority of their revenues are derived from outside of Europe, including the fast growing emerging markets. These companies have the potential to grow earnings even if Europe's economy shrinks.

A Silver Lining?

The fact that the European Union is being forced to deal with their fiscal problems now may actually make them stronger in the future. Our strength which enables our ability to continue to rack up debt with abandon in the United States may not be the blessing it appears to be.

Summary

If you have not already allocated a portion of your investment dollars to European equities, I would suggest you consider it. I believe the best ETF vehicle to use is the Vanguard European Stock ETF. It is made up of 458 stocks with an expense ratio of only 0.14%. Sometimes the scary headlines even when based on legitimate concerns and reasonable analysis create the best investment opportunities.

Source: European Stocks Are Worth The Risk: An Opportunity In VGK