Purchase three European stocks to generate income and growth over the long run

Fidelity European Trust portfolio manager Kaylie Pferten lists three of his top European stocks for both income and growth

A company's quality and capital discipline are frequently indicated by sustainable dividend growth. Strong balance sheets, resilient cash flows, and long-lasting competitive advantages are typically enjoyed by businesses that regularly turn a profit while reinvesting for future expansion. As a result, one of the main tenets of our investing strategy is dividend sustainability.

As active, bottom-up investors, we focus on highly valued companies that provide structural growth and the capacity to compound dividends over a period of three to five years. In order to locate them, we look for businesses that have strong business plans, efficient capital allocation, and sound financial standing, all of which allow them to reinvest at profitable rates while continuously raising payouts. Businesses that can profitably reinvest cash flows over time are the ones that create long-term wealth. These stocks serve as examples of our philosophy.

For your portfolio, you should think about three stocks from Europe.

The world's top provider of photolithography systems to the semiconductor industry is ASML (Amsterdam: ASML). It is the only supplier of extreme ultraviolet (EUV) lithography systems, which are necessary for producing the most cutting-edge semiconductors, and it serves 17 of the top 20 chip manufacturers. ASML has a monopoly in EUV thanks to this distinctive positioning, which supports substantial pricing power and structural expansion.

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Start your trial ASML offers remarkable long-term growth prospects as digitalization and the need for more complex chips are accelerated by AI, cloud computing, and software proliferation. Strong free cash flow conversion and gross margins exceed 50%.

These qualities, along with strong technological barriers to entry, characterize a premium franchise that can build value over time. Based on our entry price, the dividend, which has increased steadily over many years, would yield about thirty percent. Compounding businesses are not limited to the technology industry. With leading roles in oncology, immunology, neuroscience, virology, and diagnostics, Roche (Zurich: ROG) is a global leader in healthcare. Roche has demonstrated that it can maintain profit growth in spite of industry challenges such as patent expirations and the post-Covid normalization of pharmaceutical revenues. Its diverse portfolio, creative pipeline, and strict risk management all contribute to its resilience. Its long-term growth prospects have been strengthened by recent clinical successes in diseases like multiple sclerosis and breast cancer.

Roche's strategy relies heavily on disciplined capital allocation. It prioritizes long-term innovation and consistently leads the industry in R&D spending, producing appealing returns on investment. Its progressive dividend policy has been bolstered by this, as payouts have increased for over 30 years running.

The biggest banking group in Italy is called Sanpaolo (Milan: ISP). Since the financial crisis, the European banking industry has never been more structurally sound. Cost structures have improved, net-interest income has increased steadily, capital ratios have significantly increased, and risk exposure on balance sheets has decreased. However, legacy concerns continue to be reflected in valuations. Intesa is notable for its disciplined risk management, robust profitability, and varied business mix. It is supported by a steady base of retail deposits and is well capitalized and operationally effective. The bank's cautious leverage and minimal reliance on capital markets continue to be encouraging, even though earnings growth may slow as rates normalize. Intesa is an appealing long-term investment due to its high dividend yield and stress tolerance.