An ETF to Bypass the Fiscal Cliff
12/21/2012 7:45 am EST
This exchange traded fund is a good choice for income investors looking for a soft landing if US politicians can't figure out how to stop a slide over the fiscal cliff, writes Bryan Perry of Cash Machine.
Clearly the biggest surprise of 2012, in my view, has been the performance of European markets that have so far returned more for investors than US markets. I would have been hard-pressed to find anyone who would have put money on that idea. Despite all the video of riots in Greece, protests in Italy and strikes in Spain-coupled with the dire warnings of further economic contraction by the ECB for the region-European stock indexes are telling another story.
If it's true that stock markets trade according to what the next six to nine months are going to look like, then investors should be encouraged to be putting together a shopping list of high-yield companies and ETFs to consider owning once we get over, around, or through the cliff episode that has us in this chronic waiting period.
I had noted late in the summer that Warren Buffett had already started to show interest in a short list of stocks. The names remain undisclosed, but it's safe to say that they comprised some of the bluest chip names over there.
Some household names have led those markets out of the ditch, and we were involved in a few of them within the last year: Roche (RHHBY), Unilever (UN), and GlaxoSmithKline PLC (GSK). Other stocks like Nestle (NSRGY), Sanofi (SNY), British American Tobacco (BTI), Novo Nordisk (NVO), SAP (SAP), and some of the big insurers like AXA have been on a bull run of late as well, and are also helping to lead the way higher.
When it comes to truly higher yields, though, we would have to consider Banco Santander (SAN), the big Madrid-based bank with global operations and a dividend that yields 8% after being cut earlier this year. Another candidate might be Deutsche Telekom (DTEGY), Germany's largest telecom services provider, also paying a nice 8.13% yield.
Because most European stocks pay semi-annually, income investors have to wait a good while to get paid. That's why I might be more inclined to recommend a closed-end fund that owns all the big-cap names and conducts an active covered-call strategy to drive income while also allowing the portfolio to appreciate.
The one fund that seems to fit our appetite for yield is the Eaton Vance Tax Managed Global Fund (EXG), with its lofty 11.09% current dividend yield that pays quarterly. The fund owns 128 different stocks, and might just be the ticket for getting long Europe at the right time.
Shares of EXG are already up 19% for the year, and a good chunk of the dividend is a return of capital. In fact, about 30% to 40% of the income generated is ROC, which is the primary reason I've avoided recommending the fund.
As the financial and industrial sectors begin to recover in Europe, I would expect that the income generated from the option premium would also increase. But for now, I have chosen to spectate instead of participate, and have watched the fund do well by investors that had more courage.
As we get into next year, we'll get a better read as to how far the ECB is going to go with their own version of quantitative easing and the re-inflating of bank and government balance sheets. I think that economy will take considerably longer to recover than the US economy because of high-priced labor unions, large portions of the population that work in the public sector, and the rebound in the euro that will be a drag on exports.
Until then, keep an eye on DTE and SAN as possible ways to buy deeply discounted franchises that will surely offer a great upside opportunity if Europe has truly turned the corner.