U.S. stocks are doing quite well in 2017, with the Standard & Poor’s 500 index up against new all-time highs after rising about 8 percent since Jan. 1.
The reasons are pretty simple. For starters, there’s a pro-business environment in Washington, with Republicans in control of the White House and Congress. Also, the overall economy shows continued strength as evidenced by a 10-year low in the unemployment rate and consumer confidence near its highest levels since 2000.
However, some investors may be surprised to learn that for all the strength in the U.S. stock market, many European investments are doing even better.
[See: The 10 Best European Stock ETFs on the Market.]
The Euro Stoxx 50 Index, a benchmark of 50 leading European stocks including French cosmetics brand L’Oreal and German chemicals icon Bayer, is up almost 18 percent from last year. That’s more than double the performance of the S&P 500 in the same period.
“For an extended period of time, U.S. growth was the envy of the world and the only game in town,” says Scott Knapp, an investment strategist at CUNA Mutual Fiduciary Consultants. “But toward the end of last year, you started to see some signs of life elsewhere in the world, particularly in Europe.”
One such sign of life: a eurozone GDP growth rate for the fourth quarter of 2016 that topped the U.S. for the first time since the Great Recession.
That, coupled with companies in the region trading at bargain prices recently, has led many investors to look overseas.
“The markets in the U.S. went on this big, big run, and European stocks hadn’t so they were cheaper,” Knapp says. “In many ways, a bump in stock price was bound to happen because of valuation, but add the economic data into the mix and you’ve got a good base set for a run for European stocks.”
Europe offers big dividend potential. Of course, following the hot trends of the moment is very different than buy-and-hold investing for the long-term in dividend stocks.
But Europe holds big long-term promise for dividend investors, too, say many stock analysts.
Ramona Persaud manages the Fidelity Global Equity Income Fund (ticker: FGILX), and is allocating almost 25 percent of the fund’s assets toward investments in Europe. And that’s in part because cheaper shares there are benefiting from comparatively lower expectations than other regions, and can offer both better income potential as well as a better long-term value for your money.
“You can get higher dividend yields by going outside the U.S.,” Persaud says. “There just isn’t a lot of high yields in the U.S. outside of telcos, staples, REITs and utilities.”
All those sectors tend to be very low growth, she adds.
By contrast, many other sectors in the United Kingdom and Europe offer sizable dividends thanks to different corporate goals and public policies, as well as an income culture where many major shareholders are pension funds that demand sizeable dividends.
“Even for companies that can grow nicely, many still have to preserve a lot of capital for paying dividends,” Persaud says.
[See: 10 ETFs That Pay Sky-High Dividends.]
A few examples of U.S.-listed companies that are headquartered in Europe and offering big dividend potential include:
— U.K. publishing giant Pearson (PSO), yielding 7.5 percent.
— British energy giant BP (BP), yielding 6.6 percent.
— Irish computer hardware manufacturer Seagate Technology (STX), yielding 5.8 percent.
— Swiss banker Credit Suisse Group (CS), yielding 5.0 percent.
Know the risks, and stay diversified. Of course, Persaud cautions against just a “blanket recommendation to buy European companies over U.S. companies,” saying it’s important to look at individual stocks based on their specific growth rate, dividends and valuation. European dividend stocks always carry some degree of risk just as they do in the U.S., she says, and those risks can vary greatly from company to company.
And bigger picture, it’s worth noting that the cheaper valuations in Europe right now came about for some tangible reasons.
Stocks there took a hit in mid-2016 after the surprise Brexit vote in the U.K., which could put the nation on a path to withdraw from the European Union and result in economic fallout for the entire region. And while politicians and businesses have become less fearful of the vote’s consequences lately, it is dangerous to simply ignore the risks and political uncertainty in the EU, says Ben Beneche, portfolio manager of the AMG Pictet International Fund ( APCTX).
“The terms of (the U.K.’s) exit will be important but only knowable over the course of the next few years,” he says.
And while recent elections have favored more moderate candidates, such as newly elected French President Emmanuel Macron, “rhetoric has been light on clear policy” and the future of the European Union is still fragile, Beneche adds.
Scott Knapp at CUNA also warns that even hard metrics showing growth are all relative, and present a “mixed picture.”
Europe is “definitely on an upward trajectory, relative to recent history,” Knapp says. “But that doesn’t mean they’re the U.S. They’re still generally growing at a slower pace than the U.S. and some other areas.”
Still, even considering these risks, income investors should take a hard look dividend stocks Europe, both because of potential outperformance but also for the basic goal of geographic diversification in your portfolio. Holding different stocks in different regions is a great way to spread out your risk as well as tap into opportunities you may not find otherwise.
[See: 7 Horrendous Dividend Stocks to Actively Avoid.]
“The cool thing about investing globally is there’s always something going on that’s interesting, but perhaps more importantly it’s uncorrelated,” Persaud says.
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Investors Looking for Income Should Look to Europe originally appeared on usnews.com
