Market Overview

Looking To Europe For Discounts, Dividends

Looking To Europe For Discounts, Dividends

European stocks are lagging their U.S. rivals significantly this year. The S&P Europe 350 Index is down 3.47 percent year-to-date, while the S&P 500 is higher by 9 percent.

The laggard status of European stocks is sparking calls that the region's equities are attractively valued relative to major U.S. benchmarks. Investors looking to test the waters with European stocks may want to consider adding dividends to the mix.

What Happened

The O'Shares FTSE Europe Quality Dividend ETF (NYSE: OEUR) helps with that objective and reflects some of the valuation opportunities available with developed European stocks.

OEUR, which turned three years old last month, follows the FTSE Developed Europe Qual/Vol/Yield 5% Capped Factor Index.

The index “is designed to measure the performance of publicly listed large-capitalization and mid-capitalization dividend-paying issuers in Europe that meet certain market capitalization, liquidity, high quality, low volatility and dividend yield thresholds, as determined by FTSE Russell,” according to O'Shares.

Why It's Important

OEUR reflects the valuation proposition offered by European stocks. The region's equities have a forward price-to-earnings ratio of 12.8 compared to 16.8 for U.S. stocks, according to O'Shares data. Based on that data point, eight of the ETF's top 10 holdings trade at discounts to U.S. stocks.

For income seekers, ex-U.S. developed markets, including Europe, have long offered higher dividend yields than are available in the U.S.

European stocks have a dividend yield of 3.5 percent compared to 1.8 percent for the U.S., according to O'Shares data.

In the case of OEUR, the ETF has a trailing 12-month dividend yield of 4.03 percent, well above the S&P 500's 1.71 percent.

The ETF's “high quality and low volatility requirements are designed to reduce exposure to high dividend equities that have experienced large price declines,” said O'Shares.

What's Next

OEUR allocates over 48 percent of its combined weight to the U.K. and Switzerland, two of the leading dividend growth markets in Europe. France, which early this year set dividend growth records of its own, is OEUR's third-largest country weight at 15.6 percent.

Overall, 16 countries are represented in the fund. At the sector level, health care and energy names combine for almost a third of OEUR's weight.

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