Dividend delight for Europe, but political risk remains

January 24, 2017

UK equity income funds have been deservedly popular domestically for decades, and with interest rates on deposits now firmly negative in real terms, such funds remain a useful source of income that is increasingly difficult to obtain from elsewhere.

They remain, in our opinion, an indispensable tool in the armoury of any long-term investor.

However, there is no reason why the positive characteristics of such funds cannot equally well be applied in continental Europe - and there are one or two ways in which this might be easier in Europe than the UK right now.

If we have learned anything over the past few years of crisis, it is that there is no such thing as a blue chip. Once seemingly invincible stalwarts of UK income such as RBS, Tesco and BP have all, for various reasons, seen falls of 50 per cent or more in the last few years.


Bearing that in mind, the more diversification we can build into portfolios without giving up income or return, the better. This is where European dividend income can fit into a diversified portfolio.

Investors often tend to think of Europe as a low-yield market, when in fact it is broadly the same as the UK, and very competitive on an international basis, especially when compared to the derisory yields available from say Japan or the US.


It is also necessary at the outset to distinguish the politics of Europe from the companies which operate there - although on the political front Europe faces a number of challenges in 2017, including elections in France and Germany, which could leave the political leadership of the EU looking very different from its current constitution.

The expected replacement of the socialist president François Hollande of France with a centre-right candidate will be viewed as a market positive, and is probably a key reason why the UK is keen to delay Brexit negotiations, awaiting a more receptive audience.

In Germany, Angela Merkel is likely to be returned as chancellor with a weakened power base.

The only result markets are likely to fear overmuch is a Marine Le Pen victory in France. The polls say this is highly unlikely, but the polling industry's reputation for accuracy is currently somewhere between that of astrologists and economists.


The political situation of Europe rarely looks appetising - but as government-less Spain showed this year, it doesn't generally matter that much.

Investors should focus instead on the ongoing (albeit tepid) recovery underway in most of Europe, and remember that large European markets such as Norway, Sweden and Switzerland sit outside the EU and/or eurozone entirely.

Sweden, for example, is like Spain growing at a rate of 3.4 per cent, amongst the fastest globally. With such a range of opportunity, there should always be some companies worth investing in.

Income seekers will be drawn to Europe's range of quality financials. There are first-rate insurers such as Norwegian Gjensidige, which returned 8.8 per cent in dividends in 2015.

In Finland there's the excellently run Sampo, while Zurich Insurance is yielding 6.4 per cent in Swiss francs. In banks, Swedbank offers around 5 per cent. Europe also offers world-class pharmaceuticals, including Roche, Novartis and Sanofi. In autos, Daimler pays a 5 per cent yield.

Holders of overseas funds must of course also bear in mind the currency risk dimension, which post Brexit vote has acted as a handy diversifier. However, sterling could strengthen, so if you want to eliminate these risks, there are currency-hedged versions of European funds available.

No doubt 'unknown unknowns' will surprise us in 2017, but as ever, a long-term approach to investing in quality cash-paying companies should hopefully see investors through.

Olly Russ is head of European income at Liontrust Asset Management.

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