Investors seeking income have traditionally looked to the UK. However, higher yields are now available in Continental Europe, suggests Allianz Global Investors.
 
While income investing in the UK is well established, in Europe the payment of dividends has only really taken off in the last five to 10 years with the globalisation of markets and companies increasingly appreciating the importance of shareholder remuneration. 

Over the past decade, European dividend growth has averaged 10.9 per cent compared with 1.5 per cent in the UK, according to figures from Nomura.  The MSCI Europe ex UK Index now yields more than the FTSE 100 (5.6 per cent compared with 5 per cent).
 
Neil Dwane, CIO Europe, RCM, and Co-Fund Manager of Allianz RCM European Equity Income, says, ‘There are three to four times as many opportunities in Europe for us to find sustainable income compared with the UK, which is already relatively well picked over. 

‘Corporate balance sheets on the Continent are robust and less geared than in the UK.  Many European companies are taking the correct steps to manage their business in the current economic environment. They have slimmed down the business and are operating at a lower capacity which is not only sustainable, but also enables them to achieve a very high level of cash flow. That cash flow will provide dividends for some companies, and these are exactly the ones that we are looking for.’

He adds, ‘They are great companies to hold in the current environment, which may be less bright than many believe, and where we may even need another 12 months to really come out of recession. Whether or not they deliver performance in the form of a higher share price, these companies will deliver a relatively high stream of income for investors.’
 
As well as offering better opportunities for dividends, Europe also offers the opportunity for a more diversified portfolio and the ability to access sectors that are under-represented in the UK, for example telecommunications or infrastructure. Just seven stocks now account for more than half of the total yield of the FTSE 100.
 
Nick Smith, managing director of Allianz Global Investors Europe, says, ‘Investors are still facing a difficult environment and the underlying reasons for launching the Allianz RCM European Equity Income Fund remain firmly in place. 

‘RCM’s experienced investment team led by Neil Dwane and Joerg de Vries-Hippen aim to select high quality companies with proven dividend records, backed by stable cash flows.  With a target yield of 5-6 per cent this fund is very much positioned as a recovery fund and we believe it is still absolutely right for the continued weak economic environment.’