Three high-yielding European stocks to buy
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Associate Editor
David Stevenson Mar 11, 2010
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With the pound falling so far, Britain is fast becoming poor value for money, for its inhabitants at least.
If you live here, you're probably fed up with it. Overseas holidays are more expensive. Imported goods are more costly. You're seeing prices being pushed up both in the shops and at the petrol pump.
Even the people who should be cashing in, the exporters, aren't. The UK's last trade figures were rubbish, as we note below.
So, everyone's a loser? No, not at all - you could gain from the plunging pound. Not only would you protect your money – you can also collect a decent income stream while you're doing it.
We spotlighted one way of doing this last week by investing in the US. Here's another – this time in Europe...
The current outlook for sterling is grim
You won't need reminding that we're not too keen on our nation's currency right now. We don't want to see the pound drop – we just reckon that under current government policy (if that's the right word for it), it will. For our spendthrift politicians it's just a case of spend and overspend – then getting the Bank of England to print plenty more money to fuel their habit.
The trouble is that the plunging pound doesn't seem to be doing anyone in Britain much good. With a few notable exceptions, the country's exporters – the ones who are meant to save us from perpetual stagnation – aren't benefiting. Although their goods are now much cheaper for global customers to buy, they're selling fewer of them. January export goods volumes dropped by 8%. Excluding some data distortions three years ago, that was the worst monthly drop since 2002.
Sterling fell yet further on this news. Even against the much-maligned euro, it's now dropped below €1.10 to its lowest level since last November. Maybe that's no great surprise.
The countries that have dragged the euro down, such as Ireland, Greece and Portugal, are now starting to plug the holes in their public finances. They may well fail to do so, but at least they're showing the right attitude.
Not so in the UK. Electioneering and austerity don't go well together. And the longer our government delays before cutting – or being forced by the markets to slash – our budget deficit, the grimmer the outlook gets for sterling.
In the meantime, the UK's bank base rate remains at just 0.5%. So while the pound is falling, the interest rates paid on savings accounts, which are broadly linked to the base rate, are still desperately poor.
How to beat the falling pound
However, as long as you're content to take some risk with your capital – and do understand that investing in the stock market is risky – then you can beat both negligible interest rates and the falling pound.
That's because there are still some high-yielding shares around that provide a decent income. Even better, there are four reasons why buying such shares – in Europe – could, over time, make you good capital profits as well.
First, if sterling falls further, you could make money on the currency front as well as in the stock market. Although the reverse is clearly true, too, so you need more reason to like these stocks than simply because they trade in euros or another European currency.
Second, a healthy dividend yield means that a share price is low compared with the level of its payouts to shareholders. That suggests it's also good value relative to the underlying company's profits and assets. And in the long run, you'll make more money buying cheap shares than expensive ones.
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Third, and this is a very long-term view, increasing numbers of 'baby boomers' – those born within 20 years of WWII – will be retiring over the next two decades. This will mean steadily more investors looking for better income returns than the bank is currently paying. In turn, as they buy high-yielding shares, they'll push up prices.
Fourth, as the European equity strategy team at Morgan Stanley points out, when stock markets are roaring ahead, they don't worry too much about dividends. Traders are more excited in 'churning and burning' – buying and then selling out fast for quick profits. But when those markets become more 'range-bound', i.e. there's much less scope for big share price rises overall, income becomes a much larger part of investors' thinking.
Indeed – and this statistic is fascinating – since 1926, European shares have risen in real, i.e. inflation-adjusted, terms by just 1.3% a year. But add in dividends which are reinvested in more shares, and the annual total real return jumps up to 5.6% over that same period.
Three top European stocks to buy now
So what are the top dividend paying stocks in Europe right now?
Well, if you've been reading Money Morning regularly over the last few months, you'll have seen quite a few high-yield tips appearing. So I'll stick to three of those we haven't yet mentioned.
Top of Morgan Stanley's list of stocks "with a high and secure dividend yield" is Italian utility A2A (IM: A2A). It produces and distributes electricity, sells gas and collects rubbish in the North of Italy. It's on a p/e of 12 and prospective yield of 7.4%. If there's a slight caveat for me, it's that the payout is only covered 1.1 times by earnings. But that's probably being picky, as the company's cash flow is 2.5 times the dividend – so there's plenty of cash coming in to cover it.
Dividend cover is certainly not an issue at Zurich Financial Services (VX: ZURN), where the payment is almost twice covered. Yet Zurich is on a forecast multiple for this year of just 8.6, with a prospective 6% yield. Meanwhile, across the border in Germany, energy supplier RWE (GY: RWE) looks just as solid. A 2010 forecast p/e of 9.2, and a prospective yield of 5.8%, mark this stock down as very good value.
We wouldn't advise putting all of your investment money into any one currency, be it sterling, euros, dollars or yen. But at times like these in particular, it's not a bad idea to be diversified. And more to the point, these are solid stocks – so even if the currency moves against you, you know the underlying asset remains solid. And look on the bright side. If you buy shares like these, the next time you hear about another slide in sterling, you'll know at least someone who's managed to get on to a winner.
• If you're interested in high-yielding, blue-chip stocks, you should take a look at Stephen Bland's Dividend Letter. Stephen aims to produce a solid, steadily growing income by investing in large companies – you can
learn more about his strategy here
.
Our recommended article for today
When you've been investing for a while, you come to notice certain signals that the stock market throws up, says Tom Bulford. Here, he outlines three that should keep you one step ahead of the market's movements.
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