With the euro down to $1.11, European companies have a newfound cost advantage in international markets.

And the European Central Bank (ECB), which is buying bonds under its own program of “quantitative easing,” isn’t about to end that advantage anytime soon.

[ad#Google Adsense 336×280-IA]That means U.S. investors should look at dividend-paying European stocks, which may benefit from the EU’s position of strength.

There are some nice yields available, and the currency risk is now an advantage rather than a disadvantage.

The Surplus Solution
As an investor, you want to look for large current account surpluses, as they’re a good indicator of international competitiveness.

At the moment, the eurozone is expected to run a current account surplus of 2.6% of GDP, meaning it’s more than competitive with its trading partners. What’s more, since the eurozone countries maintain a stable exchange rate with each other, their competiveness is unlikely to be damaged by a sharp revaluation of the currency.

However, within the eurozone, each country’s competitiveness depends on its relative position. You see, the eurozone’s troubles have been caused, at least in part, by a competitive gap between its member economies.

The gap has widened with time, and the better economies have achieved outsized productivity growth compared with the lesser economies. This has made the poorer-performing economies run persistent payments deficits, endangering their positions within the euro.

The strongest economy, Germany, is expected to run a current account surplus of no less than 7.6% of GDP in 2015, according to The Economist. Payments surpluses are also projected to be large in the Netherlands (9.2%) and Ireland (6.8%).

On the other hand, Portugal and Spain have current accounts close to balance, and Finland and the Baltic states are expected to run small deficits.

Outside the eurozone, look to the United Kingdom (4.8%), Denmark (6.8%), Sweden (6.5%), and Switzerland (7.2%).

Going With Growth
In addition to current account surpluses, investors should also look at a country’s economic growth rate.

According to The Economist, eurozone growth is projected to average 1.6% in 2015-16, compared to 2.5% in the United States. However, the eurozone figure is a little better than it looks because eurozone population growth is just 0.2% annually. The United States, on the other hand, is at 0.7% annually.

Generally speaking, countries with large surpluses have above-average growth. Germany, for instance, is projected to grow 1.9% in 2015-16. The Netherlands is at 1.8%, Ireland 3%, Denmark 1.9%, and Sweden 2.7%. Of the current account surplus countries, only Switzerland, with 1% projected growth, is below the eurozone average.

Thus, we should look at companies paying decent dividends in high-surplus countries with decent growth – i.e., all of the above except Switzerland. Some possibilities are as follows:

  1. Based in the Netherlands, Royal Dutch Shell (RDS-A) is one of the world’s largest oil companies. It yields 4.7%, and the dividend was well-covered by earnings in the second quarter of 2015.Of course, the further decline in oil prices since then could cause problems if prices remain depressed. Luckily, Royal Dutch Shell is a relatively low-cost producer. Plus, it took advantage of the energy downturn by snapping up a major gas producer, BG PLC. Thus, RDS remains a good defensive play in this sector.
  2. RWE AG (RWEOY) is Germany’s largest electric utility. Based on 4-Traders’ expectation for 2015 earnings and dividends, RWE boasts a price-to-earnings (P/E) ratio of 5.5x and a yield of 5.9%. It’s also trading at just two-thirds of book value.
  3. Sweden- based Nordea Bank (NRBAY) is one of the largest banks in Scandinavia. It boasts a juicy dividend yield of 5.8% and a P/E ratio of 11.3 times estimated 2015 earnings. It’s also trading at a moderate 41% premium to book value.
  4. Finally, you might look at Volkswagen AG (VLKAY), a major German exporter that should benefit nicely from the competitive euro. It only yields 3%, but it’s trading at 7.2 times historic earnings and 7.5 times 4-Traders’ 2015 estimated earnings.

Bottom line: Europe has received some bad publicity this summer because of the Greek crisis, but Greece is a tiny portion of the EU economy.

With the euro made newly competitive by the crisis and the ECB determined to keep it so, European stocks make an excellent diversification choice for U.S. income investors.

Good investing,

Martin Hutchinson

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Source: Wall Street Daily