Investors are pouring money into stocks as bond yields turn negative, setting aside concerns over whether political events and flagging growth will derail Europe's stock-market rally of the last few years. Central banks have been driving interest rates down to zero to revive their economies and avoid deflation, in a move that has given equities a leg up.
The gap between the dividend yields on European stocks versus benchmark bond yields is close to a record high of 3 percent, with the number closer to 6 percent including earnings yield, according to Thomson Reuters data. While an average dividend yield of 3.5 percent might not be much to write home about when inflation is at 2 percent, it looks much more attractive when some $3.6 trillion of government bonds are trading with negative yields, as J.P. Morgan's findings last month showed. The European earnings season has got off to a good start - 62 percent of those reporting have beaten or met forecasts - and 75 percent of European companies have a free cashflow yield above their bond yields, according to Credit Suisse.
"It's a pretty weird world to live in... There is virtually nowhere to go for any yield anymore," said Greg Herbert, co-manager of Jupiter's Global Equity Income fund. He added that the outlook for dividends in Europe was improving as banks returned cash after years of post-crisis balance-sheet clean-ups. Financial stocks Swiss Re, Banco Santander and Raiffeisen Bank are among the top 10 dividend-yielding stocks in Europe - though some of these are mainly due to price falls - while UBS has trebled its dividend and ING has announced its first payout since the crisis.
That does not mean all sectors are reliable cash gushers. The energy sector, which accounts for a hefty slice of the $1.2 trillion in global dividends paid by 1,200 top firms tracked by Henderson Global Investors, is still in the grip of a crude-oil price slump that has yet to fully work through company finances. But other reliable "defensive" sectors like food, beverages or consumer goods have seen dividend yields remain healthy despite relatively expensive valuations, said Ben Lofthouse, fund manager at Henderson.
Overall, the message investors are hearing is to keep chasing yield and risk - unless you want to pay countries for the privilege of lending to them. "This is a big call for risk taking, whether you like it or not. People don't feel comfortable about it but the central banks are telling you: go out and invest, otherwise we'll punish you," Christian Gattiker, chief strategist at Julius Baer, said.
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