Telecommunications and utilities companies remain a popular choice for defensive investors, and steady increases in dividends since 2005 have added a couple of percentage points in yield to both sectors, when measured against current share prices. Telecom stocks’ payouts have dipped a little recently, reflecting dividend cuts by some of the smaller index constituents, like Italia Telecom, but remain, in aggregate, near 6%.

The financial sector has been the epicentre of the credit crunch, and the disappearing dividends of banks and other financial companies testify to their frantic attempts to conserve cash. The dividend yield on the DJ Stoxx European banks supersector index has fallen from 10%, when measured using the payouts of late 2007, to around 3% now. There’s room to wonder whether, with the recent rise in banks’ share prices, these stocks are really cheap any more. Other valuation metrics (price to book ratios, for example) may suggest so, but banks have relatively little yield support unless dividends start to pick up again quite quickly. The other three financial sectors show the same trend, but in a less extreme way.

European technology stocks have given steadily increasing payouts over recent years, although in comparative terms this remains a relatively low-yielding sector. This is a partial legacy, perhaps, of the tech stock boom of 1999/2000, when dividends were considered old-fashioned and unnecessary. The recent drop in the payout ratio from over 3% to around 2%, when measured against current market prices, reflects Nokia’s first dividend cut in seven years, which was announced in January this year. Ericsson, the third-largest company in the sector, also cut its dividend in January.

Summary

Comparing dividend payment histories to current stock market prices for different European industrial sectors reveals a great variety of trends. Sectors differ substantially, both in terms of previous dividend trends, the absolute levels of yields and the variability of past distribution policies. Given the importance of dividends for long-term equity returns, these histories can offer a useful first check when assessing whether current equity market prices offer attractive valuations.

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