Position for medium-term upside in yield stocks

We think it makes sense in the current market environment - attractive valuations on European equities, a constructive medium term outlook but near term uncertainty - to seek out quality, good value names in the European market. High dividend yielding stocks are the prime candidates in that regard - and we believe there are many across a variety of sectors in Europe.

Favourable macro backdrop for European yield stocks

We see four top-down reasons to consider yield strategies. 1) Attractive valuations and upside in Europe with the equity vs. credit yield spread looking very favorable. 2) Near-term volatility makes quality yield an attractive space to build positions, and choppy markets tend to favour yield strategies e.g. they outperformed in the 2013 taper tantrum and in 2014. 3) Deflationary growth environment - i.e. PMIs above 50 but inflation expectations falling - tends to be particularly bullish for yield strategies. 4) ECB QE extension and renewed falls in bond yields typically favour outperformance of DY stocks.

Quality yield analysis for sectors supports our OW stance in Banks & Telecoms

Banks and Insurance screen very favorably - offering some of the best combinations of yield, dividend cover and DPS growth, a high spread of DY versus credit yields (especially Banks) and positive DPS revisions trends. Telecoms also ranks favorably on DY, spreads versus credit markets and DPS growth & revisions. Resources sectors offer high DYs but dividend cover looks weak and our analysts see downside risks to earnings and dividends.

Screening for quality DY ideas in Europe

Our 'quality yield' screen provides a list of stocks offering a blend of above-market, relatively secure and growing dividends.  Financials are very well represented on our screen (Table 3) - including ING, Soc Gen, Nordea, L&G, Swiss Re and Unibail. Traditional yield sectors like Telecoms, Utilities and Tobacco are also present -including Orange, Imperial Tobacco, Snam and ENEL.  Expensive defensives i.e. other Staples and Healthcare are notable by their absence.  Several non-resources cyclicals qualify including BAE Systems, ACS and Royal Mail among industrials, Pearson in Media, Ericsson in tech and two UK housebuilders.

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