Study after study on equity investing has shown the importance of dividends for long-term returns. A recent presentation by James Montier, co-head of Societe Generale’s strategy team in London, showed that, while changes in equities’ valuations are the predominant factor influencing returns over a one-year time horizon, over five years the dividend yield and any change in dividend income account, together, for 80% of the return. If you’re investing over 10 or 20 years then the dividend yield you invest at, plus earnings growth, dominate your outcome.

But just picking the highest-yielding stocks or sectors as an investment strategy can be very dangerous. Investors in dividend-weighted ETFs suffered huge losses over the last two years as the companies with the highest payout ratios started to cut or even eliminate their dividends, leading to major stock price declines.

The trend may continue: 2009 is expected to see the largest percentage decline in US equity dividends since 1938, for example. In Europe, a recent calculation by Bloomberg showed that dividends are expected to fall by 28% this year from 2008 levels, and then by another 32% in 2010 (these levels are derived from Eurex’s dividend futures contract on the DJ Euro Stoxx 50 index).

While no one has a crystal ball to predict the level of companies’ future payouts, a sector-based look at recent European dividend history is a revealing exercise. Some sectors show a steady increase in dividends, while others have witnessed great variability in their constituent companies’ distributions, and dramatic recent drops.

Methodology

IndexUniverse.eu obtained the dividend data for the 19 Dow Jones Stoxx 600 supersector indices, starting from the beginning of 2005. These data show the dividends accumulated, month by month, by the constituent stocks in each supersector, net of withholding taxes, and excluding any special distributions. In order to smooth any seasonal variations—many European companies make their payments in the April-June period—we calculated a 12-month rolling total for each supersector’s dividends. Finally, we divided each rolling 12-month total by the closing value of the relevant supersector price index as at Friday June 26 to give a dividend yield figure, shown in each chart below.

This means that we are comparing historical dividend data with a single—current—snapshot price of the equity market, rather than examining historical equity yields, where dividend payments are usually compared to the stock prices prevailing at the time. The latter, of course, have varied significantly. There is the caveat that the composition of the relevant indices may have changed over time. Nevertheless, our methodology allows us to review the historical payout trends from sectoral baskets of stocks at their current price levels.

In the charts below we have grouped the 19 Dow Jones Stoxx supersectors into ten industry groupings, according to the categorisation rules of the ICB.

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