* Dividends back in vogue with interest rates seen staying low
* Valuations favour high yielders after year-to-date price lag
* Insurers dominate screen to top-quality dividend payers
By David Brett
LONDON, Oct 30 (Reuters) - Investors are buying European stocks that pay high dividends to make the most of an expected delay in the winding down of U.S. monetary stimulus and eventual interest rate hikes.
The U.S. government shutdown in October, combined with a surprise decision in September by the Federal Reserve not to taper its $85 billion a month of bond purchases with newly created cash, has pushed back expectations of interest rate rises. That in turn has cooled bond yields, prompting investors to seek income from dividend-paying stocks in a trend that looks set to last into the new year.
Over the last 30 days, STOXX Europe 600 companies that pay out a dividend higher than that on offer from the broader index - currently averaging 3.35 percent of the share price - have performed at least in line with peers offering lower payouts, after lagging year-to-date.
Volumes in the high yielders have been twice as great as their lower yielding peers, according to StarMine data.
The Fed is now expected to signal on Wednesday that it will not start cutting bond purchases until March.
“Because of the miserable rates offered on deposit and by other asset classes, there is perpetual demand for high-calibre yield, be it your Royal Dutch Shell, GlaxoSmithKline or even something that has underperformed like Unilever coming back into the frame,” said Tim Whitehead, strategist at investment firm Redmayne-Bentley.
Investors will need to be quick to cash in on the rally, however, with U.S. budget negotiations set to resume in early January and the debt ceiling up for debate again in February and with jitters likely to beset equity markets in the build up to each Fed meeting ahead of next year’s budget negotiations.
“For now the further stimulus wins,” Steen Jakobsen, chief investment officer at Saxo Bank, said. “This makes Q4 a potentially very strong quarter, even possibly a repeat of 1999, where sub-par performance forced mutual funds and hedge funds into massive momentum buying into year-end.”
After underperforming on price for much of 2013, higher-yielding equities now look attractive on profit expectations over the next 12 months, trading on an average price-to-earnings (P/E) multiple of 13.6, 20 percent cheaper than their peers, StarMine data showed.
StarMine’s Value Momentum (Val-Mo) model, which analyses price momentum and analyst revisions to identify stocks that appear unjustly cheap, also suggests higher yielders are better value than the lower yielders, with an average score of 61 out of 100 compared with 43.
Screening the higher yielding stocks for the best quality plays that feature in the top 10 percent on StarMine’s Val-Mo model, insurers such as Aegon and Allianz make up 40 percent of the basket of 25 companies. Nordic banks, including Nordea and Swedbank, also feature prominently.
In P/E terms, all the stocks in the basket look cheap relative to the broad market, which suggests there is still room for prices to rise should companies meet or beat analysts’ current forecasts.
“Whether you look at safe yield such as Nestle or high yield, unless we see a very sharp (rise) ... in bond yields, the (dividend) yield story is always going to be near front and centre,” said Stewart Richardson, chief investment officer at RMG Wealth Management.