* Payouts see biggest rise in real terms in 5 yrs-Henderson
* Further profit rises likely to keep payouts flowing-investors
* Bearish signals from market seen as overdone-analysts
LONDON, Aug 18 (Reuters) - Europe's corporate earnings recovery has increased dividend payouts by the most in five years, data showed on Monday, and low interest rates and a further rise in profits should keep payouts flowing.
Although recent geopolitical uncertainty in Ukraine and the Middle East - combined with disappointing economic data out of Europe - have in the short term deflated hopes for a strong pick-up in corporate earnings, investors are betting the recovery is still on track and dividends can grow.
European companies, excluding British companies, paid out $153.4 billion in the second quarter, up 18.2 percent year-on-year and the best performance on a constant currency basis in at least five years, according to Henderson Global Investors data tracking global dividends.
The second quarter is traditionally the peak season for European dividends, representing three-fifths of the annual payout, and was lifted this year by Europe's corporate earnings' recovery. Companies listed on Europe's STOXX 600 index posted a 10 percent rise in second-quarter profits, helped by cost cuts and low borrowing rates.
Going forward, the euro zone's flat economic performance in the second quarter has led European equity analysts to downgrade their earnings forecasts. They now expect European company earnings to rise 5.4 percent this year, down from initial expectations in early 2014 for a rise of 11.8 percent, according to Thomson Reuters Datastream.
Yet even 5 percent growth would still be good compared to recent years when earnings flattened between 2009 and 2013. With few obvious places for firm to invest their cash and with investor sentiment on Europe cooling off since last year's scramble to buy, some investors see the region's equities as undervalued relative to companies' payout power.
"The European region is a pretty decent place for dividend investors," said Talib Sheik, fund manager at J.P.Morgan Asset Management.
"Growth is not too hot but not too cold, rates are not too high, the mergers-and-acquisitions cycle has yet to reach its peak ... Companies are returning cash to shareholders."
European stocks currently trade at an average dividend yield of 3.3 percent, more than 200 basis points above Germany's 10-year Bund yields, which slipped below 1 percent last week for the first time ever.
This compares with an average dividend yield of 2 percent for U.S. stocks, and a yield of about 2.4 percent for stocks worldwide.
Spanish and French stocks are currently among the top-yielding plays within the blue-chip Euro STOXX 50 index : Repsol, Banco Santander, Inditex , Vivendi and Total yield between 5 and 10 percent, according to Thomson Reuters data.
The financial sector's return to relative health has also helped: France's BNP Paribas continued to pay a dividend despite a hefty U.S. fine and crisis-scarred Credit Agricole recently resumed dividend payments.
If banks' regulatory load lightens, payouts could grow, Sheik said.
Short-term market signals on European companies' long-term dividend prospects have recently turned bearish in the wake of worrisome geopolitical headlines and second-quarter euro zone data showing Germany's economy shrank and France's stagnated.
Euro STOXX 50 dividend-futures contracts for 2015 through 2019 have fallen 1 to 8 percent from their respective June highs, reflecting a recent sell-off on the cash market as the Euro STOXX 50 index itself is down 8 percent from June highs.
Some analysts and investors, however, say this downward slope of the dividend-futures curve over time is overly pessimistic.
They point to signs of an improvement in business activity in the third quarter, and say the possibility of further intervention from the European Central Bank to spur economic growth and the overall trend of global economic recovery should help sentiment recover.
"The further out you go on the dividend curve the more it is traded on sentiment and the more you see a correlation with the underlying cash index," said Arran Lamont, analyst at Citi. He estimates dividend yields in Europe should grow by around 1.5 percentage points through 2018 to around 5.5 percent.
"The long end of the curve looks oversold."
The current environment does not mean dividend investors are necessarily ramping up their allocations to Europe, said J.P.Morgan's Sheik, though he said overall dividend yield was set to grow and that potentially cheaper valuations would help.
"You need to look at dividend yield and you need to look at whether (European yields) can grow from here," said Sheik. "We think they can."
(Additional reporting by Blaise Robinson; Graphics by Blaise Robinson and Vikram Subhedar; Editing by Susan Fenton)