By Martin Hutchinson, World Banking Analyst
In the first quarter of 2015, U.S. economic growth came in barely above zero. Similarly, corporate profits have been coming in consistently below estimates.
In both cases, the culprit was the U.S. dollar.
As savvy investors, therefore, we should look to counter this trend. That means searching for investments where currencies have been weak – and where growth and earnings may come in higher than expected.
One region, in particular, provides numerous possibilities for income investors right now, and should definitely not be overlooked…
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I’m talking about the eurozone, where prospects have improved recently.
For starters, almost no oil and gas production exists within the eurozone, so the recent decline in oil prices has been economically helpful.
Meanwhile, Greece’s troubles have gotten a lot of press – but the reality is that Greece is a very small part of the eurozone, and it doesn’t much matter whether it stays or goes. Indeed, a “Grexit” would, on balance, be good for the currency, thus improving the discipline of its weaker members and increasing its economic cohesion.
| Editor’s Note: Speaking of currencies, there’s a new one sweeping America right now… and it’s not the euro. It’s not even Bitcoin. And one simple investment could put as much as $56,700 into your bank account over the next 9 to 12 months. But you must get in early… |
Finally, The Economist‘s team of forecasters estimates growth of 1.4% in 2015 and 1.7% in 2016 for the euro area, which isn’t stellar, but is above the recent average.
Now, the economies of the eurozone still aren’t integrated like American states, meaning there’s a big difference between the disparate eurozone countries when it comes to the availability of good investments.
In Germany, for example, even the dullest utilities carry yields of only around 3%. That may look attractive to German investors who have to suffer from a domestic 10-year government bond yielding about 0.4%, but it doesn’t suit us red-blooded Americans.
Luckily there are attractive buys in other countries, and we don’t even have to venture into Greece or other areas where the economics are wild and woolly.
One reminder: Most European companies withhold tax, typically at a rate of about 20%, on the dividends they pay… but this withholding tax can be offset against U.S. income tax. That means European dividend stocks aren’t very attractive holdings in tax-free accounts, such as IRAs – but in taxable accounts, there’s little disadvantage to European dividend income versus its U.S. counterpart.
Here are some European stocks from different countries and sectors that might be attractive to income investors:
Recently, the company divested its Swedish distribution business, which is expected to yield a one-time profit of five euros per share in the second quarter of 2015. It’s on a favorable rating, selling at 5.5x historic earnings, though it’s also trading at about 12x estimated 2015 earnings, excluding the one-off gain. Based on its historic dividend of 1.1 euros per share, it currently yields 6.1%.
Bottom line: U.S. investors should have part of their money in European shares for diversification purposes. Plus, as U.S. income investors with taxable accounts, we can buy European shares with little tax disadvantage. The above examples show that attractive values can be found – not to mention that U.S.-based investors may benefit even further if the euro recovers against the U.S. dollar.
Good investing,
Martin Hutchinson
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