As of January 22, 2021 I launch the portfolio, consisting of 25 companies. They pay dividends regularly and are amongst the largest companies in Europe. This article describes the stock picking process and contains the list of companies chosen. I hope that the information can become the source of investing ideas for income seeking long term investors.


  • After the recent stock market rally some of the quality stocks in Europe are still undervalued.
  • The 3 steps process of stock selection is described in detail in the article.
  • 25 stocks out of 250 largest European companies are selected to form dividend portfolio. The resulting portfolio is well diversified by industries and is in tune with the current stage of economic development.
  • The portfolio in aggregate has dividend yield 4.8% each year if pre-crisis level of dividends is considered. Before the pandemic, the companies from the list used to grow their dividends on average 10% each year over the last 5 years.
  • The stock price estimates are made, using the most popular valuation criteria – historical P/E ratio. These estimates are compared with current stock prices to evaluate price upside potential of stocks.
  • The portfolio has the potential to provide investors with income in the form of dividends as well as growth in the form of dividend and stock price growth.

The availability of the effective vaccines against the coronavirus have led to investors’ optimism and the recent stock market rally. Fiscal and monetary support from countries all over Europe adds to this optimism.  Although the spread of virus is still accelerating, investors expect gradual return of economic activity to pre-crisis levels. With that in mind, the universe of stocks, covered in this website, namely 250 largest European dividend payers, are analyzed. Through the process, described below, 25 stocks were selected to create diversified portfolio of stocks.

Step 1: Industry Allocation

We start the process of building dividend stock portfolio by looking at the current recommended industry allocation on Homepage of this website. As the European economy is in the early stage of the recovery from the pandemic, so – called “recovery” stocks are favored in that allocation. Comments on the current industry allocation are as follows.

  • When things will mostly return to normal, stocks, belonging to Financials, Oil & Gas and Consumer Services industries should outperform as they were hit hardest last year.
  • The other two cyclical industries, Industrials and Basic Materials, should perform well in the case of economic recovery as profit margins would improve materially.
  • Last year Technology outpaced all other industries. This is because tech companies grow their earnings faster than companies in other industries. The trend should continue in the future. So we should include tech stocks in a portfolio even though they look relatively expensive at the moment.
  • Healthcare is the recession – resistant industry. Companies in this sector fared relatively well last year and could be expected to do so in the future.
  • Utilities and Telecoms are not in the list. These companies could suffer from the possible increase in the interest rates as majority of them are heavily indebted. They usually underperform other industries in the early stage of economic recovery.

Step 2: Financial Performance Analysis

Now when we have the list of industries to invest in, the next step is to look for the best dividend paying companies within each industry. We use the following criteria to filter companies.

  • Dividend yield should be at least 1.5%. Stock List by Dividend Yield in our website is used to eliminate stocks with dividend yield below 1.5%.
  • Payout ratio should not exceed 100% in pre-crisis year, 2019. It means that dividend per share should not be higher than earnings per share in broadly favorable economic environment.
  • Graphs, available on the Stockscreen of each individual stock, are evaluated for dividend, sales and earnings growth in the past. It is important to identify the companies with the smooth and consistent growth in the last 5 years. Not all industries have companies with smooth growth. For example, performance of energy companies is sensitive to the oil prices. So, their performance reflects the volatility of those prices. That way several companies with relatively consistent growth are identified within each industry.
  • Then the most recent financial performance, balance sheet strength and cashflows of companies are analyzed for further selection. It is important that company has growing revenue and profits when general economy is growing. The level of indebtedness and cash flows reveal the financial resilience of company in the case of adverse events.

Step 3: Valuation

There are many great companies in each industry. However, majority of them are quite expensive after the recent rally. So, amongst selected so far companies we look for those with the higher potential of stock price appreciation. It is done by using the most popular valuation criteria – P/E ratio. We evaluate what would be the stock price if the following assumptions are made:

  • Earnings are back to 2019 level,
  • P/E is equal to the average P/E over the past 5 pre-covid years.

2020 earnings are not considered as it is exceptional year and is less relevant for longer term projections. Then the projected stock price of each stock is compared with the current one to arrive at the price upside potential.


As a result, 25 companies were selected out of 250 largest European dividend payers. In the table below you can see the list of them. In addition, the table includes each company’s dividend yield and payout ratio, calculated using dividend and earnings per share (EPS) values for 2019. Dividend growth is for the 5 years period prior to 2020.   Stock prices used to calculate dividend yields, are as of 2021 January 18.

Ticker Company name Industry Dividend Yield Dividend Growth PayOut Ratio Price Upside Potential
INGA ING Group N.V. Financials 8,7% 42% 56% 63%
LLOY Lloyds Banking Goup Plc Financials 9,4% 27% 96% 84%
ACA Credit Agricole SA Financials 6,8% 15% 47% 36%
BNP BNP Paribas S.A. Financials 6,9% 15,6% 50% 27%
GSK GlaxoSmithKline Plc Healthcare 5,7% 0% 85% 41%
FRE Fresenius SE Healthcare 2,2% 13,8% 25% 75%
ROG Roche Holding AG Healthcare 2,9% 2,4% 57% 9%
UCB UCB S.A. Healthcare 1,4% 3,6% 29% 0%
AMS Amadeus IT Holding S.A. Technology 2,3% 13,2% 50% 14%
PHIA Royal Philips N.V. Technology 1,9% 1,2% 66% -30%
SAP SAP SE Technology 1,5% 7,5% 57% -27%
BATS British American Tobacco Plc Consumer Goods 7,6% 7,3% 84% 13%
VOW Volkswagen AG Consumer Goods 3,9% 6,3% 24% 1%
SW Sodexo SA Consumer Services 3,6% 6,6% 60% 27%
ADEN Adecco Group SA Consumer Services 4,0% 6,3% 53% 41%
AHOG Ahold Delhaize N.V. Consumer Services 3,2% 9,6% 47% 11%
ITX Industria de Diseno Textil S.A. Consumer Services 1,7% 12,7% 40% 18%
HEI HeidelbergCement AG Industrials 3,3% 24% 40% 34%
EN Bouygues SA Industrials 7,4% 10,2% 82% 41%
MNDI Mondi Plc Industrials 4,5% 14,6% 49% 6%
BAYN Bayer AG Basic Materials 5,3% 4,5% 67% 60%
BBL BHP Group Plc Basic Materials 4,6% 5,9% 83% 0%
RDS.B Royal Dutch Shell Plc Oil&Gas 9,9% 0% 95% 120%
TOT Total S.A. Oil&Gas 6,1% -2% 64% 35%
OMV OMV AG Oil&Gas 5,4% 10% 39% 37%

The portfolio has the average dividend yield of 4.8% and the average 5 years dividend growth of 10.3%.  It means that if dividend payouts were the same as in 2019 and they grow as they did in the last 5 years before 2020, then this portfolio would generate 4.8% from your invested sum each year in dividends. Also it means that amount you receive in dividends would grow each and every year about 10%. These hold if you invest equal amount of money in each stock.

However, there was 2020 and there was the pandemic (and still, unfortunately, is). The pandemic created crisis was very damaging for dividend payouts. Banks were asked by European Central Bank to suspend their dividends. Some companies, like Royal Dutch Shell, announced dividend cuts throughout the year. Others probably will announce them in the near time.

In the post -covid world some companies will restore dividend; others will choose the path of gradual increases. Even though the average dividend yield for 2020 is smaller than 4.8%, it could approach this value when economy rebounds.

Investment Case

We have made a rough estimate of future stock prices, using P/E ratio method. Then calculated price upside potential of each stock by comparing current price with the estimated one (the last column in the table).  In the table above it can be seen that price upsides are positive in all industries, except Technology. It shows that stocks in those industries are undervalued at present. Technology stocks are richly valued. With undergoing technological revolution, the assumption in our model of no EPS growth from 2019 level is too conservative and unrealistic for these stocks.

Our portfolio of stocks has the average price upside potential of 35% with tech companies excluded. Value investing pioneer Benjamin Graham required 33% safety margin, meaning that he would be willing to buy a stock only if it is 33% undervalued compared to its fair value. If we use our estimates of stock prices as a proxy for fair value, the portfolio, as a whole, meets Graham’s required safety margin. So, under favorable market conditions, the portfolio could provide investors with generous enough income and growth.

As with any investment, there are risks surrounding this portfolio. Despite vaccines, the new wave of covid could lead to significant restriction of the economic activity and delay economic recovery. Industry or company specific headwinds could arise and hit companies. However, the risk is what investors are rewarded for. Exactly because of that every investor should assess the level of risk associated with investing and decide how much of it he or she is prepared to take.



The estimates made in the article are for the informational purposes only. They are the result of the rule of thumb assumptions and the real outcome might differ materially from those estimates. As the future unfolds, macro events, not mentioned in the article, could impact the company fundamentals. Use the information in the article as a starting point for your own due diligence.


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