... and a Chilean Yield

12/30/2005 12:00 am EST


Carla Pasternak

Editor, The Income Investor

Carla Pasternak, editor of High Yield Investing, is an expert at uncovering income opportunities. Her service is designed to meet the needs of a wide range of investors, from conservative to speculative. Here is a new buy--the Chile Fund--from the "high risk" side of her portfolio.

"The Chile Fund (CH NYSE) is yielding 25%. You read it right. Our ‘Income Security of the Month’ recently announced another huge $3.08 payout, bringing the total distribution for shareholders in 2005 to $4.34 per share, bringing the current yield to 25.3%. Indeed, the fund has provided investors an average 58% return, year after year, for the past decade and a half, returning larger-than-life 942% returns since inception in 1989.

"Pinochet, the brutal dictator, was ousted 15 years ago and Chile has had four democratic presidential elections since then. All major parties support the free-market economy that has made Chile one of the fastest-growing countries in Latin America. What's all this got to do with the fund? Everything, in that the Chile Fund offers North American investors one of the few ways to capitalize on Chile's stable political regime and dynamic economy. Of all South American countries, Chile carries the highest investment rating in the region; it is rated investment grade by both Standard & Poor's and Moody's credit agencies.

"What about copper? Yes, Chile is indeed the world's biggest copper producer, and we all know that commodity prices are volatile and could potentially decline in the coming years. However, the good news for investors is that this fund doesn't invest in this commodity. Why not? For the simple reason that Chile's copper mines are state-owned and are not publicly traded. Instead, the fund focuses on blue-chip dividend-paying stocks.

"Although its yield is sky-high, its investments are actually quite down-to-earth. Fund manager Matthew Hickman is continually on the lookout for attractively valued companies with strong growth prospects. The fund's top five holdings are Chile's largest utility Empresa Nacional de Electricidad, gas station chain Empresas Copec, pulp and paper maker Empresas CMPC, supermarket chain Cencosud, and phone company Compania de Telecomunicaciones de Chile. Currently, Hickman is building a position in consumer areas such as beverages and retail stocks, as he thinks the consumer will be a key driver of Chile's economy over the next few years.

"Of course, there's no guarantee that the fund's 2006 payouts will be equally generous--it all depends on how well the fund's investments perform. Also, currency fluctuations can also affect the fund's distributions. Right now, the Chilean peso is at a two-and-a-half year high relative to the US dollar. If the peso falls in value, then the fund's dividend payments will translate into fewer US dollars. Meanwhile, almost all of the fund's distributions qualify for the lower 15% tax rate.

"The shares recently peaked at $18.90, only to retreat on a pullback in copper prices. They are now selling at an appealing p/e of three times trailing 12-month earnings (versus the S&P's 16 times earnings). However, before you jump in, remember that given its volatile dividend record and earnings history, I would consider it a medium- to high-risk investment. Still, I believe the recent pullback is temporary, the yield is astounding, and I am adding this fund to our income portfolio."

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