Europe's cash-rich companies return to dividend culture

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Fund managers explain how the recovery experienced by European dividends since 2008 has further to run, despite the recent high market volatility.

"For markets with a lot of financials they are probably not there yet, but our German stock market will soon be there. We have seen most of the dividend cuts in Europe, and if you still get more cuts they would be company-specific. In other words, there are not whole sectors as a manager I should necessarily avoid."

Safety net exposure

DWS promotes its dividend strategies largely as ‘safety-net exposure' to equity prices that can be volatile.

DWS Top Dividende fund gets more than half its total returns from dividend income, and has avoided about 30% of stock market falls over five years, while capturing 97% of price gains.

If forecasts for dividend growth from DWS and other European asset managers come true, equity income investors will enjoy healthy returns from dividends.

The same is true in the UK, where a report on the second quarter from Capita Registrars revealed UK firms made the largest cash payout since 2008, at £19.1bn, a 27% climb year-on-year.

Dividends rose 19% in the first half of 2011 compared to a year earlier. This was the fastest proportional increase since the data was first compiled in 2007, and the largest in absolute terms since the first half of 2008.

In Europe, dividend growth of 16% is realistic for this year, followed by another 14% in 2012, according to Nicolas Simar, ING Investment's head of equity value investments.

How so? Because, he says, companies have not re-grown their dividends as quickly as their earnings have bounced back since the crisis.

"Dividend growth has only turned positive in the past 12 months, while profit growth adds up to nearly 30%. For this reason, and due to the dynamic dividend prognoses, ING IM feels there is plenty of scope for growth. Over the past 20 months, analysts have consistently raised their dividend prognoses, even as profit growth is increasingly moderated."

During the crisis dividends were "radically cut" by businesses preferring to hoard cash, "but since then, companies have operated profitably once more.

Globally, trailing earnings have grown 50% since the trough, and this year they will certainly surpass the record year of 2007.

"Businesses now have abundant liquidity on their balance sheets and for this reason, at least in the coming two years, dividends should show double digit growth, and they could even outperform profit growth. The pending dividend announcements in the coming months could signal record distributions for the next two years."

Simar highlights the dividends to come from financial institutions. Before the crisis about one third of all dividends came from this sector, but by the end of March this year, this had fallen 25% on the previous 12 months.

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