Inner Beauty

European banks have inner beauty

Image source: Nailya Yakubova, igorstevanovic, Civil, Ammak, naKornCreate, ClimbWhenReady, mayu85, Arayabandit - Shutterstock

What's going on?

European banks may not look their prettiest right now, but American rival Goldman Sachs believes beauty is simply in the eye of the dividend-holder…

What does this mean?

Banks have struggled in recent years because of historically low – or, in much of Europe, negativeinterest rates. That means banks aren’t able to charge more for loans than they pay savers in interest, leading to smaller profits. But according to a new Goldman report, those tough conditions haven’t hurt bank dividends: the portion of their profits paid to shareholders.

European banks are expected to yield an average of 7% next year. In other words, dividends will amount to 7% of their stocks’ value – a much better return than an investor would get from government bonds (tweet this). And of the 54 banks Goldman analyzed, it found ten it thinks are stable enough to keep paying dividends at an average yield of almost 9%.

Why should I care?

For you personally: Calculated risks.
The dividend-paying stocks of relatively predictable industries – like telecoms companies – are sometimes likened to government bonds, since they both offer regular payments. But relying on dividends is riskier: companies can decide to reduce or stop them, as Vodafone did earlier this year. And negative share price movements could wipe out an investor’s entire profit, while government bonds guarantee investors will be repaid a certain amount over time. Still, given the poor returns on offer from bonds, it’s no surprise investors might be tempted by stocks instead.

For markets: Fool’s Gold(man)?
Keep in mind Goldman’s report is based on expected dividends for next year as a return on current prices. Goldman’s high yield estimates could be because it expects dividends to be higher than they actually will be, or because the banks’ stock prices are currently “too low”. If it’s the latter, getting in before the other investors could be profitable – but if it’s the former, stock prices might fall…

Originally posted as part of the Finimize daily email.

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