Looking towards Europe could provide investors with better income opportunities than British firms as markets have evolved over the past three years, according to investment experts.
Dividends paid by European companies are more than those paid in the UK and the Continent has more companies to select for a balanced portfolio than Britain, say Alice Gaskell and Andreas Zoellinger, co-managers of the BlackRock Continental European Income Fund.
In Britain, 56% of all dividends are paid by just 10 companies, while in Europe; the top 10m companies only pay 23% of dividends.
The pair also highlight that the UK and Europe have 113 companies with a dividend yield of more than 4% and market capitalisation of £800 million or more – but only 20% of them are in the UK.
“The odds simply fall in favour of European companies,” said Gaskell. “Europe is recovering as confidence improves and joblessness falls. This is helping the markets and dividends are likely to continue to grow.
Focus on income
“Although Europe has been slower out of the blocks to recover from recession than the rest of the world, companies have strong balance sheets and benefitting from the improving economy and low political risk.”
For investors approaching retirement focussing on building their wealth, dividends provide an important income stream.
BlackRock studies show 73% of investors want to build more wealth for their retirement and almost 40% of those over 45 years old were looking for extra income, which dividends from European companies could provide, said Gaskell.
Elsewhere, investment experts at Schroders are excited about the prospects for US Treasury bond yields.
US 10 year bonds have returned a 3.5% yield so far this year – a lower than expected return that has surprised many investors.
Low bond yield concerns
“Bond investors are concerned about how much yields can still go,” said the firm’s Matthias Schieber. “Growth has slipped back, inflation is lower than expected and investors are looking at their options.”
The other concern for Schroders is low inflation in Europe that seems to refuse to budge upwards.
So far this year, average inflation across the European Union has run at less than 1% to trigger worries about deflation and the cost of living rate putting a dampener on expanding GDP.
“Investors are concerned about this,” said Schieber. “The low inflation seems to have been caused by falling energy and food prices coupled with lower import prices from a strengthening euro. Although a concern, we don’t see the risk worsening.”