Under a Bermuda High
12/15/2009 9:24 am EST
The subtropical haven has attracted some of the world’s top financial firms, as well as income investors drawn by the absence of a withholding tax, writes Carla Pasternak in High-Yield International.
As I look out at the stark scene outside my window, my mind wanders to the warm, sunny beaches of Bermuda, about 1,100 miles off the coast of Florida and worlds away from the approaching winter.
I can't resist checking out a few getaway packages... but I soon discover something just as enticing as Bermuda's sunny beaches: its economy. Bermuda is smaller than Manhattan, but enjoys the third-highest per capita income in the world—over 50% higher than that of the United States.
"How can that be?" I wonder. Is Bermuda that popular as a tourist destination? I soon see there's much more to this British Territory than tourism. That's the island's second-largest industry. "What's the first?" I ask myself.
Bermuda is practically a synonym for "tax haven." The country has no income or corporate tax, no capital gains tax, no sales tax. Thanks to that favorable tax regime, Bermuda is host to some 1,500 global companies, including the world's top insurers and shippers. So, besides its beautiful beaches, the banking and accounting services these firms require are what really power this place. Financial services, in fact, is Bermuda's number one industry.
Now, here's where the story gets interesting. I don't really care about what fuels Bermuda's economy. I do perk up, though, when I see that some of the global insurers and shippers that call the island home and require its financial services can offer me yields of up to 19%!
Plus, the yields are tax-advantaged. You see, the "tax haven" Bermuda offers isn't just for big businesses. It's also for the little guy like you and me.
Foreign withholding taxes can chop off as much as 30% from your dividend income if they're not reclaimed through a tax deduction. But there's no foreign withholding tax on Bermuda dividends. The dividend a Bermuda-based company declares is the dividend you get. No strings attached.
Here's another advantage. The Bermudian dollar is pegged to the US dollar 1:1. One Bermuda dollar equals one US dollar. You don't need to worry about the effects of currency volatility or exchange rates on the value of your investment income when translated back into US dollars.
So, how can you tap into this high-yield, tax-free, currency-equivalent market? Many of the highest-yielding global leaders are headquartered in Bermuda but listed right here in the United States. The roster includes such high-yield shippers as Nordic American (NYSE: NAT, 7% yield), Ship Finance (NYSE: SFL, 9% yield), and Textainer (NYSE: TGH, 6% yield).
You can also access the high-yield/investment-grade preferred-share issues of Bermuda-based insurers such as XL Capital (NYSE: XL-PY, 10% yield) and RenaissanceRe (NYSE: RNR-PC, 8% yield) or the exchange-traded debt of Primus Guaranty (NYSE: PRD, 12% yield).
And, there's at least one ultra high-yielding American Depository Receipt (ADR): international property insurer Caitlin Group (OTC: CNGRY, 19% yield).
Each one of these ideas is worth another look, but my two top picks right now are Ship Finance and Textainer. Both offer good yields backed by solid fundamentals.