As global economies struggle, income-producing investments will be lifted by short supply and heavy demand. In that environment, these stocks are likely to pay off, writes MoneyShow's Jim Jubak, also of Jubak's Picks.
I'm certain that ten years from now, on the other side of the current Eurozone debt crisis, higher demand and global scarcity will lead to higher prices for a wide range of commodities, such as corn and copper.
If you've got a long-term perspective and can stand the current pain, I think betting on that long-term trend makes sense. But it doesn't make as much sense as betting on the long-term scarcity of income-producing assets with solid credit ratings. (And for this column, I'm thinking of dividend stocks.)
I'm absolutely certain that those will be in higher demand in that time frame, and that they will be in even shorter supply than corn or copper. And unlike many commodity plays, these income vehicles pay, well, income. Now.
Look at the trends.
- The number of AAA-rated bond issuers in the world continues to shrink—even the number of AA-rated issuers is falling. On Tuesday, Fitch Ratings downgraded Japan two notches to A+. And how long do you think the US AA debt rating is going to last?
- Prices of bonds will fall with declining ratings—which will send yields upward—after delivering big losses to bondholders. And that's not the only danger. The currencies of deeply indebted countries will depreciate at the same time. You might get paid more dollars, yen, or euros, but they'll be worth less.
- And finally, as the world ages, pension funds, insurance companies, and the other institutions that are on the hook to deliver retirement payouts will have an increasing appetite for exactly the kind of income-producing assets that are in short, short supply: highly-rated, high-yielding, stable-currency bonds and dividend stocks.
Know where I'd like to put some of my money to profit from the thirst for income? In the high-dividend stocks of highly rated companies that do business in the world's strongest currencies.
And just in case you agree, I've put together a ten-name portfolio of exactly that kind of stock.
The Best Deal for Your Dollar
Why start any kind of a portfolio, even a dividend portfolio, in this scary market? Because when stock prices are depressed, you can buy the most dividend for your investing buck.
And the dividend bargains are even more attractive when you consider that many of the world's strongest currencies are either in countries near the Eurozone—where stocks have taken a pounding due to the debt crisis—or in commodity economies where stocks have been hit hard by the strength of the US dollar and fears of a slowdown in China's economy.
So what are likely to be the world's strongest currencies in the long run? First, I'd look to countries that run their government budgets and their financial systems very conservatively. That means Norway, Sweden, Singapore, and Chile.
Second, I'd look to countries with commodity-dominated economies that have a record of coping reasonably well with the wild swings typical of a commodity economy. I'd include Canada and Australia in that group.
Third, I'd be willing to risk a position or two on stocks in countries where the trend in the credit rating is upward, and where the fiscal policies of the government show encouraging discipline. That would include Colombia, Peru, and Indonesia. (But be aware that the risk of these countries going off the track is higher; the history we can look at is relatively short.)
Here are my ten stocks for this portfolio (with dividend yields as of May 23):
Bradken (BRKNF)
This also trades as BKN in Australia; 9.42% dividend yield.
Rather than making the big diggers produced by Caterpillar (CAT) or Joy Global (JOY), Australia's Bradken produces things like spare parts for grinding mills and slurry pump consumables, as well as providing services such as dragline refurbishment. (About 52% of sales are consumables, the company says.)
The company, which has been around since 1922, grew revenues by 28% in the first half of its 2012 fiscal year, and saw EBITDA (earnings before interest, taxes, depreciation, and amortization) climb by 11%. The company raised its dividend 5% in 2011.
CorpBanca (BCA)
7.71% yield. Chile's fourth-largest bank by loans took a big step outside that country's borders with its April purchase of the Colombia banking assets of Spain's Banco Santander (STD). I'd let this one settle a bit, since CorpBanca has just announced that it will sell $550 million in new shares to help finance that acquisition.
GrainCorp (GRCLF)
Also trades in Australia as GNC; 4.57% yield.
Australia's GrainCorp is one of the last remaining independent grain-trading companies in a sector that is consolidating quickly. I think it's a good candidate for acquisition sometime in the next 18 months. In the meantime, the company is projected to grow earnings per share by 13% in the fiscal year that ends in September.
Keppel Land (KPPLF)
Also KPLD.SP in Singapore; 7.09% yield.
With Singapore's Keppel Land, you get a piece of high-profile Singapore projects such as Ocean Financial Centre, Marina Bay Financial Centre, and One Raffles Quay. You also get commercial and residential projects in Vietnam, Indonesia, and China.
About 33% of assets are in China, with 18,000 homes sold to date and an additional 43,000 in the pipeline. Keppel Land also owns 400,000 square meters (nearly 100 acres) of commercial space in Vietnam, Indonesia, and China.
Keppel uses revenues from its property management unit to offset the cyclicality of property development. That 7% yield is a good payout while you're waiting for the eventual turn in China's real-estate market.
Northern Property REIT (NPRUF)
Also NPR-U.CN in Canada; 5% yield.
Northern Property concentrates on residential properties (66% of its holdings) with a big focus on Alberta (31% of properties).That makes this REIT a high-yield, low-risk way to play the boom in Alberta's oil sands region. More development means more workers who, along with their families, need housing. Revenue grew by 13.5% in 2011 from 2010.
Up Next: SeaDrill (SDRL)...
|pagebreak|SeaDrill (SDRL)
9.31% yield. What you're buying when you invest in Norway's SeaDrill are drilling rigs. Lots and lots of deep-water drilling rigs. The company owned 11 rigs in 2005 and closed 2011 with almost 50. And it has 13 more under construction.
As you might imagine, you don't get to be this big that fast without leverage: The company uses debt to finance new rigs, and pays out as high a dividend as it can. (In crunch times, SeaDrill would cut that dividend.) That will work as long as the amount day-rate oil companies are willing to pay keeps increasing.
SeaDrill went ex-dividend on Tuesday, so you'll have to wait a quarter for the next payout. (The stock is a member of my Jubak's Picks portfolio.)
SIA Engineering (SEGSF)
This one trades as SIE.SP in Singapore; 5.28% yield.
Somebody has to keep the airplanes flying for Asia's fast-growing airline industry, and that somebody is frequently SIA Engineering. And we're not talking just Singapore. About 50 airlines use that country's Changi airport, but SIA Engineering provides services to 80 airlines around the world
Svenska Handelsbanken (SVNLY)
4.77% yield. Svenska Handelsbanken is one of the most conservatively run banks in the conservative Swedish banking sector. (Skirting disaster, as Sweden did in 1991 and 1992 after the country's own real-estate bubble, tends to make a banking sector conservative. At least for a while.)
Right now, the bank's United Kingdom unit is taking in more money than it is lending in that market, which has the effect of reducing the bank's low cost of funding even more.
By the end of 2014, Svenska Handelsbanken will show a capital ratio (Basel III core equity Tier 1 ratio, to get technical) of 15%, Credit Suisse projects. That would leave the bank overcapitalized and able to increase dividend flow.
Statoil (STO)
4.85% yield. Norway's Statoil is one of the few big oil companies that I think is almost certain to deliver a steady increase in production over the next decade. In the first quarter, production was up 12% from the first quarter of 2011. (I added the stock to Jubak's Picks on May 10.)
Given the company's recent exploration success in the Gulf of Mexico, Tanzania, and the Norwegian continental shelf, production seems likely to increase at a faster rate after 2016.
Westpac Banking (WBK)
8.3% yield. One of four banks that dominate the Australia/New Zealand banking sector, Westpac Banking showed a low bad-debt-to-average-loan ratio of 0.36% in 2011.
The AA-rated bank is projected to show essentially flat earnings in 2012 before growth picks up to 5.2% in 2013. (I moved Westpac Banking to my Dividend Income portfolio from my Jubak's Picks portfolio on February 3.)
Of course, there is no free lunch in investing, so these ten stocks come with a catch or two. First, many are tough to buy in the United States. I've tried to include as many US-traded stocks as I can, but some of the symbols above are pink-sheet issues, and some are found only on overseas exchanges.
But the truth is that some of these higher yields are high because these stocks don't trade widely here. (Many brokerage firms have upgraded their international desks in the past few years, so it's worth asking if you see something here that you'd like to buy.)
Second, in most of these cases you'll have to pay a foreign withholding tax on your dividends. The Internal Revenue Service allows a foreign tax deduction (with an upper limit) on taxes paid to a foreign government, but there's no doubt that the foreign withholding tax will reduce your real return from dividend-paying overseas stocks.
By how much? Well, it depends on the country in question. For example, Singapore has a 0% tax. Canada's tax is 15%. Norway's is 25%. Sweden and Australia are 30%. And Chile is 35%.
To give you a sample calculation, the Australian withholding tax reduces the effective yield on Westpac Banking to 5.81% from 8.3%. Still attractive, but not a screaming I-can't-believe-it story. (Which is good, right? If it seems too good to be true, it probably is.)
When you're trying to decide which, if any, of these dividend plays might be worth it to you, it's important to think about not only the after-tax yield but also about how long you plan to hold any of these stocks. The longer you hold, the more important the currency edge is likely to be if the US dollar loses value over the next decade.
