The most heavily indebted region in the world also has some of the most generous dividend payers.

european

Seemingly on the slow road to recovery starting in early 2013, Europe’s economy has backtracked in recent months. Poor performances in the euro zone’s three largest economies – Germany, Italy and France – resulted in flat GDP growth in the second quarter, halting a string of four consecutive quarters of small but positive GDP growth.

That kind of stagnation might make most investors think twice about buying Europe at a serious bargain. Income investors would be wise not to rule Europe out.

Believe it or not, Europe is growing its dividends faster than any other region in the world. According to Forbes, European companies paid $153.4 billion in dividends in the second quarter, up 18.2% from a year ago – the region’s biggest increase in five years. The 18.2% improvement comes at a time when global dividend payouts grew by less than 12% year over year. North American companies spent “only” $98.5 billion in dividends.

Incredibly, $2 of every $5 paid in dividends worldwide last quarter came from companies based in mainland Europe.

French companies led the way, issuing $40.7 billion in dividends, up 30.3% from a year ago.

To be fair, the second quarter is typically when European companies pay out most of their dividends. About three-fifths of all dividends paid by European companies are handed out in the second quarter. Still, the growth is undeniable. As are the yields.

The average European stock trades at a dividend yield of 3.3%. That’s well ahead of the 2% yield for the S&P 500, and the 2.4% average global yield.

How is it possible that Europe’s dividends are growing so quickly at a time when its largest economies are still slumping? To understand the answer, it’s important to distinguish between Europe’s economy and its largest companies.

Though sovereign debt and high unemployment rates continue to plague the euro zone, the region’s highest-profile companies are managing to grow profits at a healthy rate. Companies listed on Europe’s Stoxx 600 index collectively grew profits by 10% in the second quarter. It was the first time in three years that European companies have demonstrated earnings growth.

The 10% earnings growth for European companies trumped the 7.6% growth rate for U.S. companies in the second quarter. As a whole, European companies have pushed their cash balances to 2 trillion euros, or $2.8 trillion – the most since 2003.

That growth is clearly fueling Europe’s dividend renaissance. So is the suddenly shareholder-friendly mentality of European companies. Stoxx Europe 600 companies are projected to pay 11.54 euros a share in dividends this year, the most since 2002. Meanwhile, capital spending has remained slow. Clearly, Europe’s biggest public companies are choosing to reward shareholders instead of investing in their businesses.

Such a strong focus on dividends is a reason for income investors to consider taking a flyer on Europe. Even as the majority of the continent struggles to dig itself out from the economic rubble of the sovereign debt crisis, the region’s largest companies are showing signs of life. Not only are European companies finally growing profits again, but they’re more willing to share their cash with shareholders than they have been in quite some time.

Europe is a scary place to invest right now. For pure yield and dividend growth, however, few economies are more attractive.

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Published by Wyatt Investment Research at