Europe stocks’ record high dividend yield relative to both government and corporate bonds supports the case for dividend plays, notes Morgan Stanley.

Graham Secker and team at Morgan Stanley in their European Equity Strategy report dated November 24, 2014 highlight that buying dividend plays doesn’t have to be defensive.

Equity valuations low relative to bonds/credit

The Morgan Stanley analysts point out that the dividend yield on European equities is at a record high relative to European government and corporate bonds.

Dividend yield at record high

The analysts believe an uptrend in macro news flow will happen, necessitating the relative valuation case for equities over bonds:

Equities are very cheap Dividend Yield

Graham Secker and team notes European equities have been a source of frustration for global investors this year and recent performance trends indicate that investors have been pruning their relative losses and trimming their exposure.

Depressed sentiment Dividend Yield

The analysts believe now is the wrong time to trim exposure to Europe for various reasons. The analysts point out that despite European ETF and mutual fund outflows at historically significant levels, Europe’s 6 month underperformance and de-rating to global stocks is close to prior lows:

Underperformance at bottom of historical average Dividend Yield

The analysts also point out that Europe’s macro data is turning up and Europe’s earnings revisions are better than the U.S. Moreover, the analysts believe Europe offers attractive valuation with their CMTI remains in buy territory at -0.53SD indicating that the risk reward for European stocks remains good.

CMTI in buy territory Dividend Yield

Dividend yield: Case for dividend plays

The Morgan Stanley analysts highlight that defensives’ dividend yield is below the market for the first time since April 2009:

DY less than market Dividend Yield

The analysts point out that Autos, Banks, Div Fins and Transport offer the best mix of dividend yield, cover and growth:

Autos, Banks screen best Dividend Yield

Thanks to European stocks’ record high dividend yield relative to both government and corporate bonds, there is a case for dividend plays. The Morgan Stanley analysts have compiled a list of three dividend-related stock screens.

The analysts note there are over 100 companies in MSCI Europe that provide a dividend yield in excess of their implied credit yield at this time:

DY above credit yield Dividend Yield

The Morgan Stanley analysts have also screened the following list of stocks with a ‘high and secure’ dividend yield:

High and secure dividend yield basket

Graham Secker et al. have also produced a European stocks with best mix of dividend yield, payout ratio and consensus DPS growth. This list has non-financial stocks and financial stocks.