Europe Is Fertile Ground for Yield Hunters as Bond Slide Stalls

(Bloomberg) -- European stocks have lost some attraction after their recent outperformance. Unless you’re hunting for yield.

The Stoxx Europe 600 Index trades with an estimated dividend yield for this year of about 3.4 percent, even following its rally this year. That’s a bumper 300 basis points over Germany’s 10-year bund yield, and compares with a spread of about 294 basis points just a month ago.

When compared with other regions, European stocks offer by far the highest yields, led by the FTSE 100, which trades at a dividend yield of 4.1 percent. This contrasts with yields of 2 percent for the S&P 500 and 2.5 percent for the MSCI All-Country Index.

This is a good opportunity for global investors, Citigroup equity strategist Jonathan Stubbs wrote in a May 26 note, saying there is potential for “significant” investment inflows into European income funds given the “yield scarcity” elsewhere.

European equities now yield more than corporate junk bonds for the first time ever, Morgan Stanley equity strategists including Graham Secker wrote in a June 4 note. Bond yields were beginning to gain on those on equity in late April, until Europe’s benchmark bund began climbing in May.

As the reflation trade cooled off in the last few weeks, stocks with both attractive and sustainable dividend yields as measured by Societe Generale have started to outperform the broad market, gaining ground while the Stoxx 600 has inched lower.

European banking stocks are among the best “yield plays,” AlphaValue analysts wrote in a note Monday, highlighting that the sector’s dividend-paying capability has been repaired after many rounds of recapitalization over the past years. About 20 European banks trade at an estimated dividend yield greater than 4 percent, including HSBC Holdings Plc, Skandinaviska Enskilda Banken AB, Natixis SA and Societe Generale SA.

To contact the reporter on this story: Blaise Robinson in Paris at brobinson58@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Todd White, John Viljoen