http://www.nytimes.com/2014/10/12/business/mutfund/the-hunt-for-dividends-may-shift-to-europe.html 2014-10-10 21:56:06 The Hunt for Dividends May Shift to Europe Many dividend-paying American stocks have become fairly pricey. But dividend hunters may find a broad selection in Europe, which is still struggling to steer clear of recession. === FOR much of the past five years, a simple strategy for beating the market has been to focus on dividend-paying stocks. That’s because the Federal Reserve has been holding down interest rates — by keeping short-term rates near zero while buying longer-term Treasuries. This drove yield-starved investors out of the fixed-income market and into dividend-paying equities with higher payouts. And when valuations on the highest-yielding areas of the stock market, like utilities, began to soar a couple of years ago, many investors tweaked their approach, shifting from the highest-yielding shares into those of companies that could consistently make their dividends grow. Today, market watchers fear that another transition is at hand — and that risks for dividend investors are climbing. For starters, even shares of these so-called dividend growers are starting to look stretched. “There isn’t much cheap out there these days,” said Anne Lester, a co-portfolio manager of the What’s more, the Fed plans to end its bond-buying program this month, and most members of the policy-making Federal Open Market Committee say they expect to start raising short-term rates before the end of 2015. The implications of these Fed moves are clear: Short- and long-term rates could start to rise soon, which means that bond investors may no longer need to buy stocks in order to buttress their fixed-income yields. And that means dividend-paying stocks could suffer. This may already be happening. In the third quarter, the Dow Jones U.S. Select Dividend Total Return index lost 3.2 percent of its value, while the Standard & Poor’s 500 index of blue-chip stocks rose 1.1 percent. Even the SPDR S.&P.; Dividend “The big picture: The environment is pretty challenging for income generation, largely due to monetary policy,” said Ben Kirby, a manager of the Although investors clearly aren’t giving up on dividends, value-minded managers are searching more selectively for dividend-paying stocks still trading at reasonable prices. One place they are looking is overseas, particularly Europe, Ms. Lester said. The average stock fund that invests primarily in Europe lost 7.3 percent of its value in the third quarter, versus a gain of 0.04 percent for the average domestic blue-chip equity fund. That means valuations of European stocks, depressed for the last two years as a result of the region’s slow growth, are even more depressed now. The price-to-earnings ratio for the MSCI Europe Index ended the third quarter at around 14, based on projected future earnings. That compares with 17 for the S.&P.; 500. Moreover, European equities have traditionally returned more of their profits to shareholders. The dividend yield on European equities was 3.7 percent at the end of the third quarter, versus less than 2 percent for domestic stocks. Perhaps the strongest reason to consider Europe is that it is at a different point in its economic cycle than the United States. The American economy is showing signs of vigor, as gross domestic product expanded at an annual rate of 4.6 percent in the second quarter. In Europe, however, the economy is teetering on the edge of what could be yet another recession, and policy makers are racing to jump-start growth. The president of the European Central Bank, Mario Draghi, has indicated that it may provide even more stimulus to the economy — perhaps in the form of so-called The upshot is that the same policy prescription that drove yield-hungry investors into domestic dividend-paying stocks may begin to push them into such stocks in Europe. Edward A. Gray, a manager of the Mr. Gray points to BMW, which sells nearly as many luxury cars in the United States and China as it does in Europe. BMW shares yielded 3 percent at the end of the quarter, yet traded at a P/E ratio of less than 10, based on projected profits. Another example, he said, is the French energy giant Total, with its global operations and markets. The stock yielded more than 5 percent at the end of the quarter and traded at a P/E of around 11. In some ways, said Mr. Kirby at Thornburg, it makes more sense to invest in the absolute highest-yielding shares in Europe, like Total, because “Europe is still in the early innings of its stimulus program and there’s less concern about rates going up there.” Moreover, if rates in the United States were to rise more than those in Europe, more investors would park their cash in dollars rather than euros, driving up the dollar’s value. That, in turn, makes goods sold by European companies abroad more affordable to foreign buyers, which should lift their sales. “The holy grail,” he said, “would be finding a European-domiciled high-yielder whose costs are based in Europe, but that exports mostly to the U.S.” IN the United States, the calculus is very different. The absolute highest yielders are “still one of the most expensive parts of the U.S. market,” said Mark R. Freeman, chief investment officer of the Susan Kempler, portfolio manager at the These are companies like Johnson & Johnson, the health care giant whose shares yield about 2.7 percent, “that raise their payout, on average, every year,” she said. Other examples are companies that investors may not regard as traditional dividend sources, like Hasbro, the toy company. With a market value of around $7 billion, it is considered more of a medium-capitalization stock and not a big blue chip. “Nobody thinks of Hasbro as a dividend play,” Ms. Kempler said, but it yields about 3 percent. Apple is another example, she said. Though not known as a dividend play, it yielded 1.8 percent at the end of the quarter, and has huge amounts of cash on its balance sheet, she said. That gives the company plenty of room to raise its dividend. Even if Apple is slow to do that, it still may deliver the type of earnings and revenue growth that traditional dividend payers rarely see.