The European Central Bank has been implementing a loose monetary policy that dragged yields down to record lows. Consequently, dividend-paying European stocks and related exchange traded funds (ETFs) may strengthen as more investors turn to riskier assets.
Like other developed markets, many European markets, both in and out of the Eurozone, are home to major equity benchmarks with higher dividend yields than the S&P 500. The yield disparity between European stocks and bonds has been widening as recent global uncertainty pushed investors out of the equities market and into safe-haven fixed-income assets.
ETF investors can also capture the potential growth in European dividend stocks also have a number of options to choose from.
For instance, the First Trust STOXX European Select Dividend Index Fund (FDD) and WisdomTree Europe Quality Dividend Growth Fund (EUDG) capture large dividend-paying European companies, and the WisdomTree Europe SmallCap Dividend Fund (DFE) follows small-cap Europe dividend stock exposure.
FDD slices the STOXX Europe 600 Index into a group of 31 components weighed by dividend yield. In FDD, components are capped at a weight of 15% and weighted by dividend yield. The bulk of the ETF’s geographic weight is allocated to U.K and Swiss companies.
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With monetary policy easy throughout Europe, potential dividend stock investors should be aware that a prolonged deflationary environment could pose a serious problem as consumers hold off spending and industries see slower growth. On the other hand, low inflation would make fixed-income assets more attractive as bonds provide higher real yields.
“The First Trust STOXX European Select Dividend Index Fund grants exposure to an index of stocks that are picked with a rigorous selection process. To be included in the STOXX Europe Select Dividend 30 Index, stocks must enjoy a positive five-year dividend-per-share growth rate and a ratio of dividend to earnings per share (EPS) of no more than 60%. In addition, they must have a net dividend yield that outperforms their region or county ,” according to Investopedia.
Just as there is with U.S. large-caps, there are legitimate dividend growth stories with some U.K. companies, some of which are already familiar to investors on this side of the Atlantic. Investors can use exchange traded funds to access some of those names. The U.K. and Switzerland are two of the top European dividend growth markets.
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First Trust STOXX European Select Dividend Index Fund