Dividend investing is more complex than it sounds. You need to look not only at the dividend yield, but also at a company's dividend history, its financial strength and, of course, its valuation.
At Morningstar, we do this by constructing specialised dividend indices and calculating a fair value for companies. Based on these Morningstar indices (you can read the methodology used at the end of the article), we have selected the best European dividend companies.
July was a positive month for European dividend companies. The index we use as a benchmark for the Europe High Dividend Equity category, the Morningstar DM Eur Div Yld >2.5% NR, rose 3.0% in euro terms while the broader European market index, the Morningstar Europe NR, gained 1.5%.
But our selection of the best European dividend companies did even better, with an average yield of 4.7% (see the table at the end of the article for each company's yield).
Within our list of companies, these are the 10 companies that gained the most last month.
Of the 10 companies, four belong to the financial sector. In particular, UK banks Natwest Group, Barclays, French bank Crédit Agricole and Italian bank UniCredit stand out.
The table below shows the European dividend stocks on our list that performed the worst last month.
Automobile companies such as Stellantis, Mercedes Benz, BMW and Volkswagen dominate the list.
Pharma Stocks Continue to Raise their Dividends
August is a month full of news about companies' quarterly results, but it is a very quiet month for dividend payments. Typically, companies pay out more than one dividend during the year. They may distribute an interim dividend that is paid to shareholders during the year and they may distribute a final dividend that is paid at the end of the year. But a company may also pay a single dividend.
This is the case for most of the healthcare companies on our shortlist: Novartis AG (NVN), Sanofi (SAN) and Roche (ROG). The fourth company, GSK (GSK), pays quarterly dividends. It is therefore a good time to look at dividends from this group of companies.
Novartis (NVN)
Novartis paid a dividend of CHF 3.30 on March 11, compared to a dividend of CHF 3.20 last year, an increase of 3.1%. The company has a tradition of increasing its dividend year after year since 1996. At current prices it has an expected dividend yield of 3.5%, but of the 4 healthcare companies on our list it has the least attractive valuation. The next dividend is expected to be paid in March next year.
It is the healthcare company of choice for managers of high dividend yielding European equity funds, ranking third in the aggregate portfolios of these funds at the end of June (see table below).
Sanofi (SAN)
The French company paid an annual dividend of EUR 3.76 last May, up from EUR 3.56 the previous year. The dividend increase this year was 5.6%. Like Novartis it has a long tradition of increasing its annual dividend, having raised it for the past 29 years.
Of the four pharmaceutical companies on our list, it has the highest dividend yield (4.07%) and occupies a prominent position in the portfolios of high dividend funds (rank 5 out of 565 stocks).
Roche Holding (ROG)
Roche is the third healthcare company on our list to have already paid its full annual dividend. It paid a single dividend on March 18 of CHF 9.60 compared to CHF 9.50 last year. Of the 4 companies in the sector it has the lowest dividend yield (3.45%), but the most attractive valuation. It trades at a Price/Fair Value of 0.73; that means it is 27% undervalued in the opinion of Morningstar analysts.
Like Novartis and Sanofi, the dividend growth track record is impeccable over the last 10 years, as shown in the illustration below.
GSK PLC (GSK)
The fourth company in the healthcare sector that we are analysing this month is the British company GSK. Unlike the other three, GSK pays dividends quarterly, usually in January, April, July and November. The last quarterly dividend it paid was £0.15 on July 11 (in July 2023, the company paid a dividend of £0.14).
GSK's next quarterly dividend will be paid on October 10 but to receive it the investor must be a shareholder of the company before August 15 2024. This is known as the ex-dividend date. The dividend will be announced on July 31.
GSK's dividend history is more inconsistent than its competitors. In fact, our analyst, Damien Conover, believes GSK's dividends are historically too high.
"Over the past five years, GSK has paid a dividend of approximately 70% of normalised earnings, which has likely limited some of the ability to reinvest in the company through both internal research and development and external acquisitions of new drugs in development.
"In addition, the 2016 special dividend seemed excessive and unnecessary. Following the divestment of the consumer group in 2022, the company reduced the overall dividend to a level that is probably more appropriate for earnings."
The table indicates the position of the stock within the index portfolio or the aggregate portfolio of the European High Dividend Equity category.
News on Dividends in August
2 August: British American Tobacco paid a quarterly dividend of 58.88 pence per share. The ex-dividend date was 27 June.
6 August: Koninklijke KPN pays an interim dividend of 0.068 euros. The ex-dividend date was 1 July.
1 August: Ex-dividend date for the next Reckitt Benckiser dividend of 80.4 pence to be paid on 13 September.
5 August: Ex-dividend date for the next dividend of ING to be paid on 12 August.
8 August: Ex-dividend date for the next Unilever dividend of 36.96 pence to be paid on 6 September.
8 August: Ex-dividend date for Barclays next dividend of 2.9p to be paid on 17 September.
8 August: Ex-dividend date for the next NatWest dividend of 6 pence to be paid on 13 September (to be declared on 26 July).
9 August: Ex-dividend date for the next dividend of Koninklijke Ahold Delhaize NV to be paid on 13 September (to be declared on 7 August).
15 August: Ex-dividend date for the next Rio Tinto dividend of 177 pence to be paid on 26 September.
15 August: Ex-dividend date for the next GSK dividend of 15 pence to be paid on 10 October.
15 August: Ex-dividend date for HSBC next dividend of 10 pence to be paid on 27 September.
How we selected the best European dividend stocks
We first selected all European stocks, tracked by our equity research team, included in the Morningstar Developed Markets Large Cap Dividend Leaders Screened Select Index. This index focuses on stocks that pay dividends consistently and have the ability to maintain those payments. The stocks are selected from the Morningstar Developed Markets Large Cap Index. The Dividend Leaders Index is comprised of the 100 highest-yielding stocks that meet the selection criteria, including environmental, social, or governance (ESG) criteria based on Morningstar Sustainalytics data.
We then rounded out the list with European stocks that are included in at least two of the following three dividend indices: the Morningstar Developed Markets Dividend Yield >3% (this index tracks the yield of developed market stocks with a trailing 12-month dividend yield greater than 3%), Morningstar Developed Markets Dividend Growth (this index is designed to provide exposure to stocks in the Morningstar Developed Markets Index with a history of uninterrupted dividend growth and the ability to sustain that growth), and Morningstar Developed Markets High Dividend Low Volatility (this index provides exposure to developed market stocks with high dividend yields and strong financial quality, while favouring those with lower volatility).
A total of 51 companies were selected in alphabetical order:
