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As advisors well know, European equities have been a frustrating proposition for the better part of a decade. That trend is continuing again this year as the S&P Europe 350 Index is again trailing the S&P 500.
Sure, European stocks, broadly speaking, are inexpensive, as is often the case, and the group showed signs of life earlier this year amid the cyclical value rally. However, as the S&P Europe 350 Index confirms, the most basic approaches to European equities still aren't worth clients' trouble.
Problem with the lengthy laggard status of European equities is that it invites market participants, including advisors, to overlook some promising opportunities in the asset class, including the WisdomTree Europe Quality Dividend Growth Fund (EUDG).
At time of low yields on broader domestic equity benchmarks and when clients are rightfully skittish about being disappointed by European stocks, EUDG stands out with a dividend yield of 2.46%. That's impressive by the standards of the current environment, but as the fund's name implies, it's actually a dividend growth strategy. Even better because European dividends are growing again and have more room to return to the pre-coronavirus pandemic highs than do U.S. dividend payers.
Evaluating EUDG
Also implied by EUDG's name is a focus on quality. That style of investing is always fashionable, but it's particularly important to income-seeking clients because quality often brings with it sturdy balance sheets and the ability to sustain and grow dividends.
“The Fund comprises 300 European equities scoring highest on a combination of quality and growth measurements, weighted by dividends. The quality score is based on three-year trends in return on equity (ROE) and return on assets (ROA), while the growth score assesses long-term earnings growth expectations,” says WisdomTree's Brian Manby.
Regardless of region, those are traits that, over the long-term, can improve client outcomes and lead to superior levels of equity income. Those characteristics are all the more compelling when mulling European equities because this is a value-heavy region, meaning there's a decent amount of junkier stocks advisors would like to steer clients away from.
“The companies’ fundamental health also enables greater financial flexibility, including the ability to potentially raise dividends for shareholders. Quality measurements lend themselves well to dividend growth potential, since companies can profitably reinvest in their business (through high ROE) with the earnings that remain after paying a cash dividend,” adds Manby. “In Europe, the methodology has delivered higher quality measures, as expected.”
Regarding quality on a regional basis, EUDG provides exposure to 16 European nations, but its biggest country exposures are also perhaps the highest quality ones in the fund. U.K. dividends are rebounding from a 2020 pandemic slump while there's ample payout growth to be had in Germany and France. Switzerland remains one of the stalwarts of European dividend growth. That quartet of countries combine for nearly 70% of EUDG's roster.
EUDG Excellent for Other Reasons
EUDG's sector attribution is also worth noting.
“Historically, the continent has been heavily constituted of old, stodgy industries, such as banking and broader Financials. The sector makes up 16% of the MSCI Europe Index, nearly three times more than its corresponding position in EUDG,” notes Manby. “The latter also has an average 4.5% over-weight allocation to the Health Care, Consumer Staples, Industrials and Materials sectors, which collectively add some growth, cyclical and defensive positioning all at once.”
Add to that, EUDG not only topped the MSCI Europe Index over the past five years and since inception in 2014, it did so with a lower beta. So while European stocks aren't perfect, EUDG might prove to be one of the better avenues for dodging disappointment on this continent.
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