Earning Income in Fast-Growing Asia
10/19/2009 1:00 pm EST
Bryan Perry, editor of Cash Machine, finds two funds that focus on dividend-paying stocks in Australia and the Pacific Rim.
The Pacific Rim [is] the most dynamic part of the world today, and it offers the potential for outsized returns for investors. So, it only makes sense to spread our risk away from dollar-based assets and into foreign currencies that will benefit from strong gross domestic product growth and bullish exchange rates.
The challenge for income investors, though, is finding instruments that pay out highly attractive yields from emerging markets, where most investment vehicles are structured for pure growth and capital gains.
ING Asia Pacific High Dividend Equity Income Fund (NYSE: IAE) seeks total return through a combination of current income, capital gains, and capital appreciation through investment in 75 to 110 dividend-yielding equity securities of Asia Pacific companies.
The management team runs a very active option strategy against the underlying stocks in the fund's portfolio. [They sell] options on its holdings, as well as against certain indexes. And with market volatility being fairly high, the premiums from the buy-write strategies, coupled with common stock dividends, yield a quarterly dividend payment of $0.498 per share or $1.99 per year, translating to a current yield of 10.5%.
Australia carries the largest weighting at 25.2%, but the combination of pure-Asia countries is over 65%. As a commodity-based economy, a country rich in raw materials, Australian companies and stocks stand to outperform from rising demand for their exports of raw materials. This would explain why BHP Billiton (NYSE: BHP) is the fund's largest holding at 4.21%. BHP is the largest diversified natural resources in the world doing over $50 billion in sales, with a market capitalization of $183 billion.
Shares of IAE went public on March 27, 2007, at $25 per share. They were subsequently clobbered [in] the global stock sell-off. I'm [recommending it] with a one-year price target of $22. Buy IAE under $19. (It closed around there Friday—Editor.)
The Aberdeen Asia-Pacific Income Fund (Amex: FAX) is a pure play on the soundness of the Australian economy and banking system, with at least 20% invested in Australian debt securities. Plus, the fund invests up to 80% of its total assets in "Asian debt securities."
Currently, FAX's portfolio includes sovereign and state government securities, supranationals, corporates, cash and asset-backed securities. The fund is also leveraged about 23% to enhance income.
As long as FAX keeps its bond maturities to six to seven years, as is the present case, we should see the 6.5% yield remain stable if not move higher as bonds with higher coupons will come to market.
Shares of FAX are near the high of the year, but [are] still almost 50% off their all-time high of $12. For those looking for stable income that counters a weakening dollar, FAX is a great fit. My 12-month price target for FAX is $8. Buy FAX under $7. (It closed below $6.50 Friday—Editor.)