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Dividends make up 40 per cent of equity returns in Europe, says Allianz research


Dividends have made up 40 per cent of overall returns in European equities over the past 40 years, while dividend paying stocks show less volatility than other stocks, according to research from Allianz Global Investors.

On a global basis, dividends often yield higher than 10-year sovereign bonds, with European companies particularly generous dividend payers compared to their peers in the US.
For more than two years investors have received a substantially higher dividend yield for holding European equities than for bonds.
Joerg de Vries-Hippen, chief investment officer, European equities at Allianz Global, says: “Investors should continue to take a closer look at dividend paying companies. We’re still finding very attractive companies with reasonable valuations that offer an even higher dividend yield. If investors want to get real returns in times of financial repression they should start to see dividend paying stocks as a possible substitute ‘to earn the coupon’ they need. A focus on sustainable dividend payments has become a clear pattern on the CEO agenda of listed companies in Europe and it looks like the dividend theme is here to stay as it is a convincing way of gaining shareholder trust. This policy does require a lot of discipline, but the good news for investors is that you’d be hard pushed to find a better proxy for the robustness of a company’s earnings expectations than its dividend policy.”
The Allianz European Equity Dividend fund, managed by de Vries-Hippen and Neil Dwane, currently displays an average dividend yield of 5.0 per cent. 
As earnings blossomed following the 2008/2009 financial crisis, the distribution ratios of companies have declined considerably. In Europe, the ratio of paid dividends to earnings per share is currently around 55 per cent, which is moderate by historical comparison. For Dennis Nacken, the author of the study, this is a sign that there is further “scope for dividend hikes”. The study points out that dividend payments have a signal effect and are thoroughly monitored by market participants and any downside revision of dividend payments is worrying. In fact, dividend payments have been far less volatile than corporate earnings in real terms as data from the US since 1900 shows.
Focusing on high dividend payments alone, however, can be misleading, Nacken says: “It is the business model of a company, above all, that should shape expectations for sustainable earnings, in addition to a shareholder-friendly corporate policy. Factors such as market share, entry hurdles or the power to set prices all play an important role in this respect. If its business model works, a company can also offset the effects of inflation by raising its prices, which increases its profits and ultimately its dividends.”

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