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

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, the AllianzGI study – “Dividends instead of low interest rates” – found. 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.

Expansionary monetary policy positive for equities

Joerg de Vries-Hippen, Portfolio Manager of the Allianz European Equity Dividend, sees another advantage of dividend stocks against the background of the expansionary monetary policy:

"If the ECB achieves both economic growth and the inflation target of 2 percent 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 de Vries-Hippen, 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 de Vries-Hippen 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. For him, France is not a "classic" Dividend country, but with nearly 15 percent it has a strong portfolio weighting: "Investors in family-run, French companies appreciate attractive and reliable dividend payments, " says de Vries-Hippen. Dividend yields generated in France were on average 3.3 percent last year.

Focus on selected stocks adds to performance advantage

In addition to strong balance sheets, stable income streams and solid business models, the sustainability of dividend payments is crucial for de Vries-Hippens’ 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 currently 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 [1].