Fixed-income investors looking for yield are struggling in the near-zero interest rate environment in the United States. According to Zach Abraham and other financial industry experts interviewed in US News & World Report yesterday, there may be opportunities in European equities.
When considering European stocks that pay dividends, it’s important for fixed-income investors seeking an income stream to remember that many European companies pay out their dividends only twice a year, instead of quarterly as many American companies do. Also, the fluctuating exchange rates between countries can impact dividends for American investors.
To decide whether any dividend-paying stock is a good investment, it’s important to analyze the business and make sure it has a reasonable valuation. “For dividend-paying stocks, the best place to start is looking at a company’s balance sheet to see if the company can sustain the dividend,” says Zach Abraham, principal and chief investment officer at Bulwark Capital Management in Tacoma, Washington, just outside Seattle.
Zach says that when comparing European companies’ valuations versus those in America, here “we have record valuations, record corporate debt levels, yet you have valuations in the stock market that suggest to you that everything is humming along,” Zach says. In the U.S. in particular, corporate debt levels are rising, and Zach Abraham recommends looking at a company’s debt obligations when evaluating them. “The higher the debt on a company’s balance sheet, the more likely that company is to cut back or suspend that dividend,” he says.
He warns investors that there’s never been a period in America where stock market valuations have been this detached from the underlying economic fundamentals. “In the U.S., the Nasdaq is up in a year where we’ve sustained the biggest economic shock in our history.”
European markets have also been hit by the pandemic; however, Abraham says that “they’re far from trading at record high valuations. Due to the damage the valuation spread has done to the economy, European equity prices are attractive with more upside,” Zach says.
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The article also appeared on WTOP News.