European dividend yields exceed bond and cash interest rates

• Marcus Weyerer
  Director of ETF Investment Strategy for EMEA
  Franklin Templeton

However, the search for yields further down the curve involves higher risks – as impressively demonstrated by the sharp rise in long-term yields in France and the UK due to fiscal and political uncertainties. As a result, while bonds and cash remain important components of diversified portfolios, their role as virtually exclusive sources of income has diminished. And, of course, fixed-income instruments offer only limited or sometimes no capital gains opportunities. 

In contrast, dividend stocks are experiencing something of a renaissance in Europe. Germany’s €500 billion infrastructure package signals a significant fiscal expansion^[i] that will reshape the investment landscape for years to come. This change is prompting many investors to revisit equities in order to generate both growth and income. Dividends have long played a central role in the performance of European equities. Over the past 20 years, dividends have accounted for over 40% of the total return on European equities.^[ii] This is not a marginal contribution, but a structural feature of the market that underscores the continuing importance of dividends as a stabilizing element of returns.

European dividend yields are currently above bond yields and cash rates, resulting in a yield differential that could be attractive to long-term investors. The widening spread has refocused attention on dividend strategies as a complement to traditional fixed income securities.

Source: Bloomberg, August 25, 2025; European equities are represented by the MSCI Europe Index, European bonds by the Bloomberg Euro Aggregate Index, and cash by the EURIBOR 1 Month.

The strength of European dividend culture

Dividends are not a minor consideration for European equities—they play a central role in how companies return value to their shareholders. With a long-term average payout ratio of 68%, compared to 43% in the US and 37% in Japan^[iii] , Europe continues to stand out as a region where dividends are firmly embedded in corporate practice. 

This commitment is evident across a wide range of sectors. In addition to areas such as energy and utilities, financials are among the most significant contributors. With an aggregate core capital ratio of around 16%^[iv] , European banks have strong capital buffers. This gives them sufficient flexibility to return a portion of their profits to shareholders in the form of dividends, subject to regulatory and company-specific considerations.

These sectors illustrate how consistent distributions and high ratios give Europe a distinctive income culture. For investors, this deep-rooted dividend culture—supported by established distribution practices and reinforced by sector breadth—makes income a defining feature of the European equity landscape.

Source: Bloomberg, respective MSCI country indices, as of August 26, 2025

Dividends across market cycles

A characteristic feature of dividends in Europe is their consistency across different market environments. While it has been difficult to achieve significant growth in Europe recently, dividends have generally proven resilient to economic cycles and market shocks. This stability means that dividends can form a basis for returns even during more volatile price movements.

In addition, dividends can help support stock prices themselves. Since dividend payments are often an important factor in traditional stock valuation models, companies with stable and predictable distributions can be valued more accurately than growth stocks (where future cash flows tend to be more uncertain). These approximations of fair value can serve as a floor during market downturns. Dividends are not tied to a specific cycle but can serve as a permanent feature of equity investments—they help smooth results in the short term and increase value creation in the long term. 

 Introducing a quality perspective

Income-oriented investors considering equities typically pursue three overarching goals. The first goal is, of course, to generate adequate income. The second goal is often long-term capital preservation. And the third goal revolves around the potential for capital gains—otherwise, fixed-income securities might be the more appropriate option. Focusing solely on nominal dividend yield may achieve the first objective, but it misses the other two. Companies with particularly high yields sometimes reflect falling stock prices or financial stress rather than sustainable strength. We prefer a quality-oriented approach to distinguish between attractive opportunities and potential pitfalls.

Key quality metrics include:

• Return on equity (ROE): A profitability metric that indicates how efficiently a company generates profits relative to its equity.
• Earnings volatility: An assessment of the stability of earnings across economic cycles, which can provide insight into the reliability of future earnings.
• Debt ratio: Assessment of the balance sheet, as a lower debt burden may indicate financial resilience and stability.

Together, these criteria provide a more complete picture of dividend sustainability. Combining yield with efficiency, stability, and financial discipline can help identify attractive and sustainable dividends that leave room for future growth. The LibertyQ European Dividend Index illustrates this: its rules-based approach, which balances yield with quality filters, currently delivers a dividend yield of 4.8% compared to 3.2% for European equities as a whole and an average return on equity of 15.8% compared to 11.9%.^[v]

Resilience and diversification

By focusing on companies with strong profitability, stable earnings, and solid balance sheets, this approach tends to favor companies that are better positioned to maintain dividends across different market phases. One consequence of this process is that it often leads to lower exposure to information technology within European allocations. This is not a conscious sector bet, but rather reflects structural differences: many European IT companies invest heavily in growth and pay out only small dividends. For investors, this can be an advantage rather than a disadvantage, as it is a natural complement to US equity exposures, where technology plays a much greater role in generating returns. Automobile manufacturers are also largely absent from the LibertyQ European Dividend Index, as their cyclical nature is disadvantaged by the methodology. This was particularly advantageous during the volatility triggered by Trump after the initial announcement of tariffs and the weak European trade agreement with the US.

So far, this focus on dividends with a quality approach has proven to be more stable than the broader European market in volatile phases in 2025.

Source: Bloomberg, as of September 2, 2025

Conclusion

With bond yields falling and cash rates moderate, dividends have once again become a potential source of income. Europe has a strong dividend culture, with higher but sustainable payout ratios and above-average yields compared to other developed markets. In the long term, dividends account for a large part of European equity returns, underscoring their structural importance.

What distinguishes a European quality dividend approach is its additional focus on fundamentals. By emphasizing profitability, earnings stability, and solid balance sheets, this strategy aims to generate returns that are not only attractive but also sustainable. In 2025, our quality-oriented profile has already shown greater resilience than the broader European market in times of volatility – underscoring how dividends and quality can work together to smooth returns amid rising uncertainty. For global investors, this results in an allocation that can serve not only as a source of income, but also as a defensive anchor and diversifier, balancing exposure to US growth and technology stocks with Europe’s established dividend culture and quality characteristics. 

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^[i] CNBC, 2025

^[ii] Bloomberg, MSCI Europe Index and MSCI Europe Net Total Return Index, September 2025

^[iii] Bloomberg, 10-year average dividend payout ratio of the MSCI Europe Index, MSCI USA Index, and MSCI Japan Index, as of September 4, 2025

^[iv] ECB Data Portal, European Central Bank, 2025

^[v] Bloomberg, LibertyQ European Dividend Index and MSCI Europe Index, as of September 3, 2025