How to harness high dividends from equities

Ostrum AM’s Frédéric Leguay explains how institutional investors can harness European equities’ dividend edge

It is unsurprising that some institutional investors are wary of equities. Equities are volatile, yields are undefined and timeframes for returns are unpredictable.

At the same time, equities tend to outperform bonds over the long term and few investors have the luxury of being able to eschew equities altogether. It’s a perpetual dilemma for CIOs.

However, there are ways in which institutional investors can harness strong yields from equities without taking risks they cannot afford.

The power of dividends

Frédéric Leguay, Head of European Equity at Ostrum Asset Management, outlines his approach to extracting stable and sustainable yields from equities. “We start with the premise that total returns from shares are derived more from dividends than from share price growth,” he says.

Dividends, Frédéric notes, have been the main contributor to net returns from global equity index performance over the last 25 years¹. In Europe, where high-dividend sectors are prominent and where investors favour companies which pay sustainable dividends, the contribution of dividends to overall returns is particularly pronounced. Around half the earnings of European companies are distributed as dividends, compared with around 30% in the US¹.

And the spread between the total distribution yields in Europe and the US is nearly 200bps, the widest it’s been since 2008 (the dividend yield is about 3.1% in Europe, compared with around 1.2% in the US and both share-buy-back yields are similar)¹.

Leguay and his High Dividend Equity team invest at least 90% of client funds in eurozone equities and up to 10% in European equities located outside the eurozone.

“Dividends are seen as an important part of capital allocation by companies in Europe, offering protection for investors,” says Frédéric. “This is beneficial for investors who want a structural allocation to equities, but feel markets are frothy. The dividends provide visibility.”

Ostrum AM, which has AuM of €386 billion² and is an affiliate of Natixis Investment Managers, believes the European market has strong fundamentals, which could underpin dividend payouts going forward. Frédéric says: “Europe is generally underinvested and valuations are still attractive.” He sees stability in European earnings per share, coupled with sustainable generation of corporate cash and low leverage, enabling companies to sustain or even increase returns to shareholders.

Seeking growing dividends as well as high dividends

Ostrum AM’s approach is to identify companies which have either high and sustainable current dividends, or companies which are expected to increase dividend payouts. It limits its exposure to both the very high dividend and very low dividend segments, focusing instead on the most sustainable dividends in the 3% to 6% range.

“Our objective is a balanced portfolio which blends high dividends and growing dividends,” notes Frédéric.

The very high dividend segment – companies yielding 7%-9% – is often considered too risky. This segment includes companies whose share prices have recently collapsed, possibly because the market views their business models as stressed, leading to potential future dividend reductions.

“We do not want to embark a too high value sensitivity, so we voluntarily avoid names like these,” says Frédéric.

Growth names balance high payers

Although dividends are the largest part of returns from equities, investing for dividends alone may not produce a portfolio which outperforms, or even matches, an index.

“We do not want to convey that high dividends on their own will enable us to outperform the market,” says Frédéric. “We seek to combine high yield with share price upside potential.”

That’s why Ostrum AM seeks names which it judges have upside valuation potential as well as the appropriate level of dividends. This entails selecting some companies where dividends are closer to the lower threshold of 4%, but which have the potential to grow their earnings and their payouts.

“In this way, we balance our investing approach, selecting growth stocks where there is a lot of potential terminal value rather than just high current dividends,” Frédéric says.

Both higher dividend-paying and growing companies are selected based on qualitative analysis of companies' business models, long-term strategies, management quality and balance sheets. In particular, highly indebted names are avoided, as these companies tend to cut dividends sharply during downturns.

ESG integration, including shareholder engagement, is carried out at each stage of the process. “Integration of ESG criteria is a key component of our selection process,” adds Frédéric.

Where do the opportunities lie?

To ensure dividend payouts are sustainable over the long term, Ostrum AM supplements its analysis of corporate dividends and fundamentals with an evaluation of the long-term trends driving the growth of equity markets in Europe. These trends include energy transition, digital infrastructure rollout, climate-focused initiatives and demographic change.

“These drivers are still evolving but they have already produced high-dividend opportunities,” says Frédéric, adding that these opportunities can be found in a range of sectors, including technology, healthcare and financial stocks.

In fact, high dividend names are distributed across most sectors and countries, aiding portfolio diversification. Currently, the financial sector, utilities and telecoms account for the most high-dividend names. “We are overinvested in these sectors,” says Frédéric. “Valuations are reasonable, and earnings and cashflow visibility is good.”

High dividends are also found in sectors which currently face challenging conditions, such as autos, consumer staples and materials. Frédéric says: “We are cautious about autos and materials, but we are actually overweight consumer staples because yields are good and we see upside in the prices.”

Ostrum AM has minimal exposure, however, to oil and gas³. “On top of environmental concerns which severely limit the investment in oil producing companies, we think supply-demand balance will deteriorate in the months to come,” says Frédéric. “Even though oil and gas is paying 6%-8% now, commodity prices could come under pressure going forward.”

Insurance is a particularly attractive sector. Ostrum AM finds insurance names with 7% yields, but still offering 5%-plus potential dividend growth.

Targeting lower volatility and higher returns

Frédéric’s investment team targets a beta of 0.9 versus the market. Because the high-dividend segment is naturally lower beta than the market, volatility in Ostrum AM’s investment strategy is reduced.

Returns from this market segment are primarily driven by near-term cashflows, reducing the sensitivity to changes in interest rates and inflation. This is especially valuable in a high-interest-rate environment.

Meanwhile, the current geopolitical backdrop is pushing investors towards companies with high visibility earnings and payouts. “Lower risk-appetite investors like the visibility provided by this segment,” says Frédéric. “In this sense, it can be seen as a defensive approach.”

In addition, markets have moved higher for a number of years and many investors are looking for a hedge in the case of a downturn, particularly in the US markets. As Frédéric puts it, “Sustainable dividend yield and growth approaches are most useful in times of uncertainty because this is often when we see the greatest valuation dispersion”.

Interview conducted in September 2025