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40% of European equity returns since 1970 generated by dividend payments, says AllianzGI study


Dividends have been a key driver of investment performance when real interest rates are low, a study of data from the last forty five years shows.

European companies pay particularly high dividends, according to an AllianzGI study – “Dividends instead of low interest rates”.  In 2014, the average dividend yield across the MSCI Europe was 3.3%, creating a historically rare, wide gap between dividend payments and the yields on European government and corporate bonds, Outside of Europe, a number of other regions also offer dividend yields that are higher, in some cases considerably higher – than the returns on 10-year government bonds, including Australia, Brazil, New Zealand and Norway.
At the same time, dividends have proven their ability to enhance the stability and real performance of a portfolio. In the past, investors in European equities in particular have enjoyed substantial dividend payouts. On a 5-year rolling basis, dividends have made a consistently positive contribution to MSCI Europe performance since 1970, enabling them to partially offset or at least mitigate (1970–1975, 2000–2005) the effects of share price losses. Dividends accounted for around 39 % of the total annualized return of equity investments for the MSCI Europe over the entire period from 1970 to 2014. Dividends also contributed more than one-third to total performance in other regions, such as North America (MSCI North America) or Asia-Pacific (MSCI Pacific), although the dividend yields themselves were lower in absolute terms.
Dividends’ ability to act as a stabilising factor is further underlined by a look at the US market from 1950 to 2014, when US dividend strategies showed better results in times of both inflation and deflation than the wider US market.

Neil Dwane, Chief Investment Officer Equity Europe at Allianz Global Investors and Portfolio Manager of the Allianz European Equity Dividend fund, sees advantages for dividend stocks against the background of expansionary monetary policy: "If the ECB achieves both economic growth and the inflation target of 2 per cent with its latest monetary policy measures, investors will be well-positioned with dividend stocks. Due to their defensive nature these names offer an important combination of relatively high dividend yield, historically low volatility and inflation and deflation protection.”

Given the current geopolitical risks, including the ongoing conflict in the Ukraine the European road ahead may be bumpy and stock setbacks are likely. 

According to Dwane, however, this environment favours for dividend stocks: "In uncertain times, companies with strong business models have clear advantages. They have above-average capital ratios and stable capital flows, so that they can keep their investors’ trust in the form of stable pay-outs – especially, in times of tough headwinds."
In 2015, Dwane expects a slight price tailwind for European dividend stocks from the euro weakness, which should have a favourable impact on US dollar exports. Rising demand and higher-euro gains should have an overall positive impact on the economic situation in Europe.
Britain, where dividends generated an average yield of 3.7 per cent last year, remains one of the most important markets for dividend stocks "Britain is the motherland of dividends. No other country has an older tradition or culture in terms of the sustainability of the dividend payments. This is also reflected in the substantial portfolio overweight. Around 43 per cent of the portfolio is in British companies,” says Dwane.
For him, France is not a "classic" Dividend country, but with nearly 15 per cent it has a strong portfolio weighting: "Investors in family-run, French companies appreciate attractive and reliable dividend payments," says Dwane. Dividend yields generated in France were on average 3.3 per cent last year.
Italy, where dividend stocks generated an average yield of more that 3 per cent last year, earned his attention in the current environment: "Italy is a special country when it comes to dividend stocks.  Dividend stocks certainly aren’t in the majority, but there are some Italian companies with unique business models that also offer attractive, reliable dividend payment.”
Switzerland, where dividend stocks generated an average yield of approximately 3 per cent last year, remains an important market, with qualification: "Certainly, the Swiss will have to overcome economic challenges with the strong Swiss franc, but when it comes to dividend shares it remains a dream land. You can’t find more stable businesses in the world.  That naturally raises the desire of investors, which is reflected in high ratings. Given that burden on the dividend yield, we remain cautious", says Dwane.
In Belgium, dividend stocks generated an average yield of 2.5 per cent last year: "Belgium is a special country for dividend stocks. A little like Italy, you won’t find them everywhere, but there are opportunities if you know where to look”.
In addition to strong balance sheets, stable income streams and solid business models, the sustainability of dividend payments is crucial for Dwane’s stock selection. "We concentrate on companies that continue to pay dividend yields above market average. This focus on quality and yield is the foundation of the stable outperformance of the fund. Broader distribution would dilute the average dividend yield of over 5% quickly ", said the portfolio manager of the Allianz European Equity Dividend fund.
A total of 42 stocks are currently in the portfolio. The Active-Share, which measures a deviation of the fund portfolio from the benchmark (MSCI Europe Total Return) is approximately 84% by 01/31/2015. The investment decisions are based on own research of Allianz Global Investors.

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