As we head towards the end of a difficult financial year there are signs that the markets are beginning to turn. According to Goldman Sachs, the US is approaching a soft landing, the EU is about to stabilise while the UK, though resilient, will lag the US and the EU.
Latest data shows that inflationary pressures are softening in the US, UK, and a number of European countries, and this together with lower oil prices and a nudge higher in US unemployment has led to expectations that the Federal Reserve, the Bank of England and the European Central Bank may opt for interest rate cuts earlier than initially expected. Money markets have fully priced in 100 basis points’ worth of rate cuts by the ECB by the end of 2024.
Though the rate rise cycle seems close to being over and some money that has been parked in bonds for the last six to nine months is likely to move back into equities, there is no promise of a fast stock market recovery on the horizon. In those circumstances opting for high dividend stocks, a strategy that has worked well this year, may be a better option than plain vanilla investment.
The question is which stocks, and in which geographies?
There are a few different investment approaches. One is to opt for companies that offer one-off ultra-high dividend payouts, ranging from 200% to 700% and usually connected to some sort of one-off or terminal event. A case in point is Europe’s highest dividend yield this year of 700% paid out by French firm Neocom Multimedia (MLNEO) after the firm sold its business and liquidated.
Another European stock (although not Eurozone as Norway is not in the EU) is Norwegian health tech company PasientSky. The company paid out a 480% yield earlier this year after it sold two of its subsidiaries.
The more reliable and durable approach is to opt for companies that consistently pay high dividends and for companies that increase their dividend year on year. There are over three hundred companies that fall into that category in Europe and over 500 in the US. If we are looking only over a 12-month period European companies have performed better than their US peers.
The WisdomTree US Quality Dividend Growth UCITS ETF is trading 4.83% higher since the start of the year and up 6.14% over the last year. In contrast, the WisdomTree Eurozone Quality Dividend Growth Index quoted in euros returned 7.47% year to date and 13.14% over the last 12 months.
Some of the best performers in Europe this year include Belgian communications firm Proximus (yield of 17.20%), Greek oil company Hellenic Petroleum (14%), Spain’s Enagas (11%), and German companies Telefonica Deutschland (10.3%), RTL Group (10.3%) and BMW (9.6%).
In the UK the highest yielding dividend stocks this year include Diversified Energy, Phoenix Group, British American Tobacco, National Grid, Intermediate Capital, Rathbone and Smurfit Kappa, paying out an average yield of 8.60%.
In the US the pool of quality stocks that provide high dividends is large and changing from month to month, making it difficult to pin down the top performance over the longer term. In October alone the seven companies that have provided the highest yield were Walgreens Boots, 3M, Realty Income, Amcor, Franklin Resources, T. Rowe Price and Federal Realty Investment Trust, with an average dividend yield of 5.89%.
Here opting for an ETF wrapper that combines quality stocks with long-term yield may be a better option than picking individual stocks.
