WHY DO EUROPEAN STOCKS PAY GOOD DIVIDENDS?

By The Sick Economist

Ah, Europe, sweet Europe. French baguettes and Spanish tapas. Beer and wine ripened in the Old World sun. Six-week vacations. Certainly a continent known for easy living and a penchant for the high life.

But did you know that it’s also easy to find high dividend paying stocks in Europe? This doesn’t require special knowledge, or even much work at all. Many Euro stocks simply pay higher dividends than their American equivalents. For example, the EuroStoxx 50, a broad index of the fifty largest European companies, has paid a median divided yield of 3% over the last five years; at times that yield has gone as high as 4.22%. By comparison, the S&P 500 in America has typically yielded around 1.8% during the same time period. With no skill at all, you could earn double the dividend yield of American stocks just by buying a European exchange traded fund.

Many critics could say that companies that pay “too much” dividend are not growing. They say something must be wrong if they pay double the dividend of their American competitors. This is a wrongheaded notion.. Most major American companies have enough cash flow that they could easily pay much higher dividends. They choose not to. Instead, they typically choose to buy back their own stock. Europeans prefer plain old dividends.

Math is math, and greed is greed. History shows that all human beings, whether they be from Philadelphia or Flanders, like to get paid. So why would Europeans choose to receive payment in the form of dividends rather than share buybacks?

A different history and a different culture lead to different choices. Let’s take a look at three reasons why European capitalists prefer dividends.

The Noble Dividend

One of the most important reasons why large, publicly traded European companies tend to reward shareholders with dividends rather than buybacks is the ownership structure. Many large, brand-name Euro companies are actually still controlled by founding families. This arrangement would NOT be like Walmart now, which is controlled by Sam Walton’s four children. This would be like Walmart circa the year 2100, when it is controlled by Sam Walton’s 25 great grandchildren.

In the Old World, everything is, well, old. So, large, well-known corporations that have been in business for hundreds of years are still controlled by families. Because it’s been so many generations, the family shareholdings themselves are often split between dozens of cousins, which, as you can imagine, can lead to some migraine-inducing
ownership structures.

One example would be Roche. Roche is a global pharmaceutical giant with around 95,000 employees. The company was founded in Basel, Switzerland in 1896, and is still domiciled in Switzerland. The total value of the company’s shares on the open market is $300,000,000,000, of which half are still owned by dozens of cousins descendent from the founding Hoffmann family.

So, a private family still controls the third largest pharmaceutical company in the world. Nice work if you can get it. The way they got it was by never selling shares. Roche has shunned share buybacks in comparison to it’s American counterparts because selling shares would not be in the interest of the controlling family. The only way that share buybacks work is if someone wants to sell shares. The members of the Hoffmann family haven’t sold in over a century.

In the world of Euro stocks, selling shares means selling control for some very, very rich families. So, dividends become the preferred method of rewarding shareholders. According to moneyinvestexpert.com, Roche has raised the dividend for 32 consecutive years. Every shareholder gets the same dividend payout, whether you are a member of the Hoffmann family, or just a plain Deiter in the cobblestoned street. That annual cash payout has quintupled since the year 2000. As I write this, the current share price is $43 and the dividend yield is 1.7%. But remember, the Hoffmann family has owned the same shares since they were worth just $4 or less. So they could easily be reaping a 20% annual yield to cost, or even much more. Who needs the aggravation of share buybacks? Meaty dividends have funded a regal lifestyle for Roche’s controlling shareholders for the last century.

Another reason why founding families would be reluctant to dilute their corporate control by selling is because of who their other shareholders are. In Europe, most major companies have several large blocks of shareholders. In Germany, for example, by law labor unions must have a certain percentage of representation on the board of directors.

At the same time, it’s not uncommon for local or even national governments to own a large block of shares. So, a controlling family that sells shares to get quick cash risks handing corporate control to the labor unions, or worse still, the government.

Due to these baroque shareholder structures, founding families are often in a tug-of-war with other large shareholders. Lately, this has been a very hot topic at Volkswagen, the largest manufacturer of cars in the world. On the company’s website, the Board of Directors is described as the following: “The Supervisory Board of Volkswagen AG comprises 20 members and conforms to the German Co-determination Act.” This means that, by law, labor unions must be represented on the board. The State of Lower Saxony owns 20% of the company, so the government has representatives on the board. The government of Qatar owns 17% of the company, so they have representatives on the board. The founding family owns 35% of the company, but controls 50% of the votes due to special share classes, so they have representatives on the board. The unwieldy nature of this ownership structure was laid bare in 2020, as the industry wide shift to electrification caused private power struggles to burst into into the open:

FRANKFURT, Nov 27 (Reuters) – Volkswagen’s Chief Executive Herbert Diess has asked the company’s owning families to back a contract extension in a bid to break a management deadlock at the world’s largest carmaker, two people familiar with the matter told Reuters. The appeal for support from the Piech and Porsche families, who control a majority voting stake at the carmaker, comes after Diess was forced to relinquish management responsibility for the VW brand in June to retain his job as group CEO. “He is bringing the issue to a head,” one of the sources said. Volkswagen declined to comment. The owning families declined to comment, the company’s works council and the German state of Lower Saxony, which owns a VW stake, declined to comment.

To American investors, this scenario seems bizarre, but it’s a common situation on the European continent: at some of the world’s largest, best-known companies, it’s hard to tell who’s really in charge. If you were a member of a controlling family, and you were legally forced into a constant, uncomfortable tango with labor unions and the government, would you want to sell shares? Does it look like anyone at Volkswagen wants to give up an ounce of control? In these kinds of situations, steady and growing dividends are the way that shareholders can reap cash flow without ceding control.

Speaking of uncomfortable, isn’t it surprising to learn that Europe, a continent now renowned for a socialsitic way of life, is still home to many mega corporations that are still controlled by what is essentially aristocracy? How can a continent that taxes workers’ incomes at up to 60% still be home to Lords and Ladies who have owned major corporations through passive vehicles for a century or more? How is France, the home of “Liberte, Egalite and Fraternite” also the home of Bernard Arnault, a world-famous billionaire whose family controls publicly traded LVMH-Moet-Hennesy, the legendary purveyor of luxury goods?

The answers to these questions are beyond the scope of this website, but suffice it to say that big business in Europe struggles with dicey publicity. They wouldn’t want to attract the negative attention that big share buybacks can bring in America.

When a company is swimming in cash, many observers feel that share buybacks hurt workers and “stakeholders”, i.e. people who depend on the company for their livelihoods, even if they aren’t shareholders. For example, cash burned on share buybacks could instead be invested in factories that create new jobs, or invested in cleaning up a company’s environmental footprint. In America, the cultural attitude that prevails is that companies exist to build wealth for shareholders alone; lip service is
provided for other stakeholders, but when push comes to shove, American culture is all about getting paid.

Many Europeans may secretly feel the same way, but the prevailing culture is very focused on fairness and social well being. The fact that France taxes workers at double American rates, yet also provides Dior and Hermes luxuries to the world, is just a careful balancing act that corporations must navigate. In this environment, the quiet regularity of dividends draws less negative attention than share buybacks.

We’re All Euro Now

Studies show that many investors suffer from what researchers call “home country bias.” This means that Americans are more comfortable buying American stocks, Japanese more comfortable buying Japanese stocks, etc. While there are many great reasons to accumulate American stocks (which we will go over in the following chapters), some allotment to European stocks is recommendable if you want to live off of dividend payments.

Some investors hesitate to purchase European stocks due to technical concerns. Maybe this would have been a barrier thirty years ago, but today it’s very easy. Whatever brokerage you use in America is likely to offer a wide variety of ADRs from major companies all over God’s Green Earth. An ADR is an American Depository Receipt. It is a ticker symbol that trades on American stock exchanges mirroring the share listing of stock in its home country. I own dozens of ADRs; they are just as easy to buy as an American stock.

Another rational concern might be accounting and standards. Most Americans are familiar with financial regulatory bodies like the SEC (Securities Exchange Commission) and the IRS. How can we trust stocks from foreign lands? What if the accounting is different, adding complexity? Is anyone regulating these stocks at all?

The good news is that the very rich people who own the majority of stocks are typically citizens of the world. They often travel widely and own assets on every continent. As such, you can usually expect similar standards in accounting and financial regulation across major global financial markets. Would I recommend buying stocks based in Latvia? Perhaps not. But core, Western European countries have been doing this a long, long time. You can expect accounting and financial rules to be similar to what you would find on this side of the Atlantic. Regulatory documents will almost always be available published in English.

Some investors who pay attention to current affairs and global economics might have one last, common sense question. If European economic growth is sluggish, why would an American want to invest in European stocks?

It’s been well documented that European economic growth has been sub-par for many years. Double digit unemployment is common in the southern half of the EU, the birth rate is the lowest it’s ever been, and growth of Gross Domestic Product has been anemic for most of the 21st century. If European companies only sold goods in Europe, I would tell you not to invest.

However, that very sluggishness is what has caused long established European large capitalization companies to become global powerhouses. VW, despite it’s chronically dysfunctional ownership structure, remains the largest car manufacturer by volume in the world. They certainly didn’t sell all of those cars in Germany! VW has operations in almost every country on the map. Wherever growth is on the globe, VW is there. The same goes for Roche, and most other companies that make up the Euro Stoxx 50.
The only reason we categorize these companies as “European” is because a disproportionate number of shareholders and upper management are European citizens. This leads to decisions that can be different than companies primarily owned by Americans; for instance, the decision to pay out dividends rather than buy back stock. But make no mistake; these titans of global commerce do business in any country that has a solvent currency. As a shareholder, we simply sit back, relax, and enjoy our quarterly dividend checks. How to make those dividend checks grow is the problem of Claus or Francois back at headquarters.

How To Choose

How to find good dividend stocks headquartered in the Old World? The process is very simple. 90% of Americans don’t even bother to look across the pond due to that home country bias phenomenon. Just by looking, you can instantly beat out 90% of your competitors.

If you don’t want to put in the time and effort to do research, you can always buy a broad based exchange traded fund, just like the Euro Stoxx 50 that we discussed earlier in the chapter. Pretty much every flavor of American exchange traded fund has a European equivalent, which can easily be procured from companies like Vanguard or iShares. Very often, these ETFs will yield more than their American counterparts, because of all the reasons we reviewed earlier in the chapter.

Even if you prefer individual shares, the process can be simple. In the next few chapters, we will be reviewing different industry sectors in the American stock market that tend to offer high yields. If you decide, for example, that you want to invest in oil, first check American companies. Then look up European counterparts. For example, as I write this text, Chevron, a legendary American oil company, offers a dividend yield of 5.6%. BP (British Petroleum) has nearly identical operations across the globe, but offers a dividend yield of 7.67%. These two companies aren’t clones, but in reality they are very similar. One yields 30% more than the other. Making the trip across the Atlantic may well be worth it.

You can repeat this comparison in most major sectors. Energy, pharmaceuticals, consumer goods, even real estate investment trusts. Comparing European companies to American companies is just like checking out both Amazon.com and Walmart.com before you buy. Good shoppers find good deals. So can you.