Long-term yields for U.S. Treasuries should indeed firm but be tempered by a slowing as this phase o...
10 high dividend stocks that pay in currencies stronger than the dollar
05/25/2012 8:30 am EST
But not as much sense as betting on the long-term scarcity of income-producing assets with solid credit ratings. 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 issuers in the world continues to shrink. Even the number of AA-rated issuers in the world is falling. Yesterday Fitch Ratings downgraded Japan two notches to A+. And how long do you think the U.S. AA rating is going to last?
Prices of those bonds will fall with declining ratings—which will eventually send yields upward—after delivering big losses to bond holders. But that’s not the only danger. The currencies of deeply indebted countries will depreciate at the same time. You might get paid more dollars or more yen or more 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 in that environment to profit from that trend? 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 10-name portfolio of exactly that kind of stock.
Why start any kind of a portfolio, even a dividend portfolio in this scary market? Because it’s when stock prices are depressed that 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—so the stocks in these markets have taken a pounding in the euro debt crisis—or in commodity economies where stocks have been hit hard by the strength of the U.S. 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 economies dominated by commodities—that have a demonstrated 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 do recognize that the risk of these countries going off the track is higher because the history that we can look at is relatively short.)
My 10 stocks for this portfolio?
- Bradken (BRN.AU) 9.42% yield on May 23, 2012. Rather than making the big diggers produced by Caterpillar (CAT) or Joy Global (JOY), Australia’s Bradken mostly produces things like spare parts for grinding mills and slurry pump consumables as well as 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 (CORPBANC.CI) 7.71% yield on May 23. 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 (GNC.AU) 4.57% yield on May 23, 2012. Australia’s GrainCorp is one of the last remaining independent grain trading companies in a fast consolidating sector. 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 2012.
- Keppel Land (KPLD.SP) 7.09% yield on May 23, 2012. 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. And commercial and residential projects in Vietnam, Indonesia, and China. About 33% of assets are in China with 18,000 homes sold to date and another 43,000 in the pipeline. Keppel Land also owns 400,000 square meters 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 (NPR-U.CN) 5% yield on May 23, 2012. Northern Property concentrates on residential properties (66% of its holdings) with a big focus on Alberta (31% of properties.) That makes this REIT (real estate investment trust) a high yield, low-risk way to play the boom in Alberta’s oil sands region. More development means more workers who, with their families, need more housing. Revenue grew by 13.5% in 2011 from 2010.
- SeaDrill (SDRL or SDRL.NO) 9.31% yield on May 23, 2012. What you’re buying when you buy shares of Norway’s SeaDrill is drilling rigs. Lots and lots of deep water drilling rigs. The company owned 11 rigs in 2005 and closed 2011 with almost 50 rigs and another 13 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 day rate oil companies are willing to pay keeps increasing. SeaDrill went ex-dividend on May 22 so you’ll have to wait a quarter for the next payout. (The stock is a member of my Jubak’s Picks portfolio http://jubakpicks.com/ .)
- SIA Engineering (SIE.SP) 5.28% yield on May 23, 2012. Somebody has to keep the airplanes flying and for Asia’s fast growing airline industry that somebody is frequently Singapore’s SIA Engineering. But we’re not just talking Singapore. About 50 airlines use that country’s Changi airport but SIA Engineering provides services to 80 airlines around the world
- Svenska Handelsbanken (SSHBA.SS) 4.77% yield on May 23, 2012. Svenska Handelsbanken is one of the most conservatively run banks in the conservative Swedish banking sector. (Skirting disaster, as Sweden did in 1991-1992 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 that the bank is lending in that market, which has the effect of reducing the bank’s already 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) of 15%, Credit Suisse projects. That would leave the bank overcapitalized and able to increase dividend flow.
- Statoil (STO). 4.85% yield on May 23, 2012. Norway’s Statoil is one of the few big oil companies that I think is just about certain to deliver a steady increase in production over the next decade. In the first quarter of 2012, production was up 12% from the first quarter of 2011. (I added the stock to Jubak’s Picks http://jubakpicks.com/ on May 10.) Given the company’s recent exploration success in the Gulf of Mexico, Tanzania, and the Norwegian continental shelf, production looks likely to increase at a faster rate after 2016.
- Westpac Banking (WBK). 8.3% yield on May 23, 2012. One of the 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 added Westpac Banking to my Dividend Income portfolio http://jubakpicks.com/ on February 3, 2012.)
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 U.S.-traded stocks as I can but the truth is that some of these higher yields are because these stocks don’t trade very widely here. (Many brokerage firms have upgraded their international desks in the last 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 IRS 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. If the foreign tax is higher than the current 15% U.S. tax on qualified dividends (for investors in the 25% tax bracket or above), you’ll get less than the headline yield.
How much less? 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%. (You can find a good list of all of the rates at this SeekingAlpha.com post http://seekingalpha.com/article/248039-withholding-tax-rates-by-country-for-foreign-stock-dividends 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’s 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 not just about 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 U.S. dollar does indeed lose value over the next decade.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Bradken, CorpBanca, GrainCorp, Keppel Land, SeaDrill, Statoil, Svenska Handelsbanken, and Westpac Banking as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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