Companies in Europe are generous to shareholders: the more than 400 companies in the MSCI Europe index paid out a record amount of €407 billion in dividends last year. They will likely surpass that record in 2024 and next year, Allianz Global Investors expects.
The return of a stock investor consists not only of any price gain when selling the shares, but also of profit distributions to shareholders: dividends. If you have found a company that really pampers its shareholders, it can be a great source of income. If you also choose to reinvest the profit distribution, you can grow your capital more quickly. After all, the new shares also provide returns, and so on.
So it is a positive sign if companies across the board pay out more dividends. This appears to be the case in Europe. Never before have companies in the MSCI Europe index, which together represent 85% of the total market capitalization of freely traded shares in Europe, paid out as much dividend as last year: €407 billion flowed into the pockets of shareholders. This year that will rise to €433 billion and in 2025 to €460 billion. That is an increase of 13% in two years.
This means that the dip we saw during the corona pandemic is over, as can be seen in the graph below.
If you look under the hood, you will see major differences at sector level. The largest increases can be seen in the financial sector and in the consumer durables sector. This makes it important for dividend investors to be selective in their stock selection.
Norway has the highest dividend yield in Europe
The dividend yield is also on the rise. This figure shows the ratio between the dividend and the stock price. This works according to the following formula:
dividend per share / stock price x 100
For example, if a company pays out €0.40 dividend per share, at a stock price of €20, the dividend yield is 2%. If the same company pays out twice the amount of dividend, the dividend yield is 4%.
According to Allianz, the average dividend yield for companies in the MSCI Europe index stood at 3.47% at the end of 2023. This year that could rise to 3.67%. Whether this actually happens depends not only on the dividend that companies pay, but also on the stock price. If this goes down, the dividend yield goes up and vice versa.
Belgian and Dutch companies are doing less well in this area than many other countries in Europe. In Belgium the dividend yield is 2.87%. According to Allianz, this will amount to 3.10% next year. In the Netherlands, an average of 2.53% was measured in 2023 and that is expected to rise to 2.60% this year.
Companies from Norway are proudly at the top, with a dividend yield of 7.2% in 2023 and 6.40% this year. The Norwegian index, the OBX, has a relatively large number of energy companies. One of the most important companies is Equinor, which paid out a bonus dividend last year in addition to a regular dividend.
36% of the total return on shares comes from dividends
The importance of dividend payments for the total return of equity investments is sometimes underestimated. An inventory by Allianz Global Investors shows that over the past 44 years, almost 36% of the annual total dividend on shares in the MSCI Europe index has been due to dividend payments. This is lower than in North America (for the MSCI North America index it is 22%), but higher than in the Asia/Pacific region (for the MSCI Pacific index it is 41%).
In recent years, the relative importance of dividends has increased even further. From 2019 to 2023, dividend payments (2.51 percentage points) made up almost half of the total return of 5.13%. In fact, from 2014 to 2018, they accounted for the vast majority (by 2.75 percentage points from 2.96%).
According to researcher Hans-Jörg Naumer, dividends have developed more steadily than corporate profits over time. He deduces that companies try to maintain their dividend policy as much as possible and tend to increase rather than decrease dividends; even if corporate profits show weak development. That is not so strange. When a company decides to cut its dividend, investors often see this as a red flag. This often leads to a significant price penalty.
Dividend policy calls for discipline
The Allianz researchers also noticed that the prices of companies that pay dividends often fluctuate less rapidly than those of shares of companies that do not pay dividends. The fact that a dividend policy calls for discipline may play a role in this. A company that has promised a reward to shareholders must be careful with its financial resources and use them efficiently.
There is then less chance that the company will be tempted into uncertain adventures, such as an overly expensive takeover or an investment in a project with little potential. Because if such a decision turns out wrong and the dividend has to be suspended or reduced later, investors will punish this mercilessly.
“The general rule of thumb is: corporate profits fluctuate less than share prices and dividends fluctuate less than corporate profits,” summarizes Hans-Jörg Naumer. According to him, dividends provide stability in the portfolio, especially in times of disruption.”
Also read: 24 American stocks with growing dividends
The IEX Editorial Team consists of a team of content managers, journalists and analysts, with more than a hundred years of experience in producing and publishing investment information and opinions. The information in this column is not intended as professional investment advice or as a recommendation to make certain investments. It is possible that editorial staff hold positions in one or more of the funds mentioned.