Goldman Sachs Builds Case for European Dividend Strategies

(Bloomberg) --

After more than a decade of underperformance, European income stocks may be set for a revival, according to Goldman Sachs Group Inc. strategists.

“We think there is now a case for selective high-yield strategies,” Guillaume Jaisson and his colleagues wrote in a note to clients on Tuesday. “In Europe, the yield gap between equities and bonds remains particularly large.”

Among reasons for higher yielding stocks to start outperforming again, Jaisson cites their low sensitivity to rising bond yields. In a high inflation climate, investors might prefer “real” cash flows in the near term compared with uncertain capital gains, while dividends will become an important driver of returns in an environment of high macro volatility, he adds.

European high-dividend stocks have trailed the broader market over the past 15 years, as falling bond yields boosted longer-duration equities such as technology stocks, while many high-yielding stocks became viewed as so-called value traps.

Jaisson sees various ways of gaining exposure to dividends, notably through cyclical stocks. Energy shares and banks are seen as the largest contributors to the 10% dividend growth expected for the Stoxx Europe 600 Index this year, he says.

Other strategies include “dividend champions” such as Enagas SA, Phoenix Group Holdings Plc, British American Tobacco Plc, BASF SE, Allianz SE, as well as two baskets: a High Dividend Yield basket (GSSTDIVY) and a Dividend Growth basket (GSSTDIVG).

“The structural demand for income remains strong,” Jaisson wrote, noting that during the stagflation of the 1970s the optimal allocation was almost 100% in high yielding stocks.