European dividends: yield day

John D Rockefeller loved dividends; nothing gave him more pleasure. He would be happy with European companies (outside the UK), which increased dividends by 18 per cent in the first half; their best showing since 2011. Good news for those betting on a recovery in Europe. However, like Mr Rockefeller, it is best to save your money from here. Dividends cannot sustainably rise at this pace for much longer.

Despite a rebound this year, European income stocks have trailed their global peers, according to fund manager Henderson. Moreover, this region has had the worst performance of all others since 2009.

The proportion of earnings paid out as dividends has risen in Europe to 60 per cent Citi says, a historically high level. If dividends cannot rise much higher relative to earnings, then perhaps some more earnings improvement can drive dividends higher.

But return on equity seems too low in Europe to support much earnings growth. The MSCI Euro index's return on equity is estimated at just 8 per cent for this year; compare with the US, at 15. Low return on equity coupled with high dividend payouts leaves little to increase shareholder equity. If equity does not expand, then cash for growth must come from somewhere else: more leverage or asset sales. In the oil sector, for example, divestments have enabled some companies to raise funds to cover their dividend requirements.

True, Australian companies do pay out even more of their earnings. But shareholders there receive a substantial dividend income tax break, known as franking, not widely available in Europe.

Meanwhile, Citi's data suggest that both the US and Japan can offer more love. During the 1980s, US dividend payouts were double today's meagre handouts, even if buybacks are more popular. In Japan, growing confidence in the global economy has encouraged more largesse, too. Toyota has nearly tripled its dividend since 2012. Look elsewhere than Europe for dividend growth.

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