Markets
The Power of Dividend Investing
The Power of Dividend Investing
If you start talking about dividend investing at your next cocktail event, it’s possible that other patrons may not see you as the life of the party.
But that’s okay – because while dividends are not necessarily sexy, they are a foolproof way to reel in consistent, predictable returns in the market. And for decades, seasoned investors have leaned on dividends to help power their portfolios through both good and bad times in the market.
What is a Dividend?
When a company earns a profit, it essentially has two options.
1. Re-invest in the business
This is the option chosen by many high-growth companies. They pay down debt, or expand their operations to make more profit in the future.
2. Issue a dividend to shareholders
A dividend is a share of after-tax profit of a company, distributed to its shareholders according to the number and class of shares held by them.
How and when is a dividend issued?
- Both the amount and timing of dividends is determined by the Board of Directors
- Usually for public companies, dividends happen on a quarterly or annual basis
- Most dividends are declared by large and established “blue chip” companies (i.e. P&G, McDonald’s)
- Dividends are often paid if a company is unable to reinvest its cash at a higher rate than shareholders
Most importantly for investors, dividends from good companies should be predictable and sustainable. Some companies like Coca-Cola have been paying out uninterrupted dividends on common stock for over a century.
The History of Dividends
1250
The first company to ever pay a dividend was likely a French bank called Société des Moulins du Bazacle, which was formed in 1250.
1602
The Dutch East India Company was the first company to offer shares of stock. It famously paid a dividend that averaged around 18% of capital over the course of the company’s 200-year existence.
1684
The Hudson Bay Company was likely the first North American company to have paid a dividend. The first dividend went to shareholders 14 years after the company’s formation in 1670, and was worth 50% of the par value of the stock.
1910
In the early 20th century, most investors only cared about dividends. At the time, stocks were expected to have a higher dividend yield than bonds to compensate investors for the extra risk carried by equities.
2003
Microsoft declares its first dividend after 28 years of rapid growth.
Today, roughly 422 of the 500 stocks on the S&P 500 pay a dividend, including companies like 3M, Chevron, Walmart, and McDonald’s.
Why is Dividend Investing Powerful?
Most investors are aware of the power of compound interest – and dividends work in a similar way, especially when dividends get reinvested back into the company.
That’s why investing $10,000 in Coca-Cola in 1962 would have yielded more than $2 million by 2012, which is 50 years later. Dividends get reinvested to buy more stock, which produces more dividends, and so on.
The advantages of dividend investing are as follows:
- Companies can increase dividends over time. (P&G, for example, has increased their dividend every year for 60 years)
- Companies can’t fake dividends – a company either declares a dividend, or it doesn’t
- Dividends protect against inflation. (Dividends have increased 4.2% since 1912, and inflation has increased 3.3%)
- Dividends create intrinsic value, as they generate cash flow for investors
- Dividends can help combat volatility – that’s because dividend yield increases as the market price of a stock falls, making the stock more attractive
Dividends are a key way for companies to give back to shareholders, and in the right situation, dividend stocks can be a powerful component in an investor’s portfolio.
Markets
The European Stock Market: Attractive Valuations Offer Opportunities
On average, the European stock market has valuations that are nearly 50% lower than U.S. valuations. But how can you access the market?
European Stock Market: Attractive Valuations Offer Opportunities
Europe is known for some established brands, from L’Oréal to Louis Vuitton. However, the European stock market offers additional opportunities that may be lesser known.
The above infographic, sponsored by STOXX, outlines why investors may want to consider European stocks.
Attractive Valuations
Compared to most North American and Asian markets, European stocks offer lower or comparable valuations.
Index | Price-to-Earnings Ratio | Price-to-Book Ratio |
---|---|---|
EURO STOXX 50 | 14.9 | 2.2 |
STOXX Europe 600 | 14.4 | 2 |
U.S. | 25.9 | 4.7 |
Canada | 16.1 | 1.8 |
Japan | 15.4 | 1.6 |
Asia Pacific ex. China | 17.1 | 1.8 |
Data as of February 29, 2024. See graphic for full index names. Ratios based on trailing 12 month financials. The price to earnings ratio excludes companies with negative earnings.
On average, European valuations are nearly 50% lower than U.S. valuations, potentially offering an affordable entry point for investors.
Research also shows that lower price ratios have historically led to higher long-term returns.
Market Movements Not Closely Connected
Over the last decade, the European stock market had low-to-moderate correlation with North American and Asian equities.
The below chart shows correlations from February 2014 to February 2024. A value closer to zero indicates low correlation, while a value of one would indicate that two regions are moving in perfect unison.
EURO STOXX 50 | STOXX EUROPE 600 | U.S. | Canada | Japan | Asia Pacific ex. China |
|
---|---|---|---|---|---|---|
EURO STOXX 50 | 1.00 | 0.97 | 0.55 | 0.67 | 0.24 | 0.43 |
STOXX EUROPE 600 | 1.00 | 0.56 | 0.71 | 0.28 | 0.48 | |
U.S. | 1.00 | 0.73 | 0.12 | 0.25 | ||
Canada | 1.00 | 0.22 | 0.40 | |||
Japan | 1.00 | 0.88 | ||||
Asia Pacific ex. China | 1.00 |
Data is based on daily USD returns.
European equities had relatively independent market movements from North American and Asian markets. One contributing factor could be the differing sector weights in each market. For instance, technology makes up a quarter of the U.S. market, but health care and industrials dominate the broader European market.
Ultimately, European equities can enhance portfolio diversification and have the potential to mitigate risk for investors.
Tracking the Market
For investors interested in European equities, STOXX offers a variety of flagship indices:
Index | Description | Market Cap |
---|---|---|
STOXX Europe 600 | Pan-regional, broad market | €10.5T |
STOXX Developed Europe | Pan-regional, broad-market | €9.9T |
STOXX Europe 600 ESG-X | Pan-regional, broad market, sustainability focus | €9.7T |
STOXX Europe 50 | Pan-regional, blue-chip | €5.1T |
EURO STOXX 50 | Eurozone, blue-chip | €3.5T |
Data is as of February 29, 2024. Market cap is free float, which represents the shares that are readily available for public trading on stock exchanges.
The EURO STOXX 50 tracks the Eurozone’s biggest and most traded companies. It also underlies one of the world’s largest ranges of ETFs and mutual funds. As of November 2023, there were €27.3 billion in ETFs and €23.5B in mutual fund assets under management tracking the index.
“For the past 25 years, the EURO STOXX 50 has served as an accurate, reliable and tradable representation of the Eurozone equity market.”
— Axel Lomholt, General Manager at STOXX
Partnering with STOXX to Track the European Stock Market
Are you interested in European equities? STOXX can be a valuable partner:
- Comprehensive, liquid and investable ecosystem
- European heritage, global reach
- Highly sophisticated customization capabilities
- Open architecture approach to using data
- Close partnerships with clients
- Part of ISS STOXX and Deutsche Börse Group
With a full suite of indices, STOXX can help you benchmark against the European stock market.
Learn how STOXX’s European indices offer liquid and effective market access.
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