A world of choice for income investors
As the greenback declines, U.S. investors should look for yield abroad, say these experts, and their choices include a Canadian forestry stock.
The U.S. dollar still has its days, but it’s just not like the old days.
Despite the occasional spurt, the general trend for the greenback appears to be down.
If you’re an income investor in the U.S. this is not good news. (If you’re a Canadian exporter it’s not the greatest news, either, but that’s another story.)
So look abroad, two experts tell American investors. Writing in Personal Finance, they urge U.S. investors to seek out “stocks of healthy, growing, dividend-paying companies based overseas.”
Looking abroad is nothing new for these experts. Mr. Roger S. Conrad and Mr. David Dittman also edit an online advisory called Canadian Edge.
But investors should be looking at more than one foreign outpost these days, they say. In addition to one Canadian stock, they also recommend stocks from Finland, France, Israel, Italy, Spain and Singapore.
Here’s one big advantage, the authors tell their readers. “When the dollar declines, investors effectively receive an automatic dividend increase and capital gain.”
That may not apply in Canada with our muscular loonie. But the next advantage does. “More important, international markets are home to many of the surest and most lucrative opportunities for growth.”
Fat yields, rapid growth
A decade ago, the U.S. dollar index (which measures the dollar against a basket of currencies) traded at 155.54. Now it trades at 75.
That means it has lost more than half of its purchasing power against those currencies. And it’s lost even more compared to gold.
It’s a non-partisan decline, too, say the authors. Republicans and Democrats have both presided over the dollar’s demise. Both have also contributed to the enormous budget and trade deficits that seem certain to keep the dollar languishing.
So the authors turn to their global solution — “international stocks that offer fat yields, rapid growth and exposure to strong currencies.”
Some trade as American Depositary Receipts (ADRs) in New York, making them as easy to trade as U.S. stocks. Others trade “over the counter,” which may require a little more dexterity from your broker.
They also note that U.S. investors holding these stocks in an IRA (i.e., RRSP) can’t recover the dividend withholding tax from most countries. But Canada takes no cut of the dividends paid by Canadian firms into an IRA.
If that helps increase the flow of American money into Canadian stocks, so much the better. And we’ll begin with a Canadian stock.
Quintessential hedge
Acadian Timber Corp. (TSX-ADN; OTC-ACAZF) “is in many ways the quintessential hedge for U.S. investors seeking growth and income,” say these two experts. The company operates in New Brunswick and Maine, selling logs to lumber mills, pulp and paper mills and wood waste to biomass electricity plants.
The dividend was just raised to $0.82. It yields a staunch 6.7 per cent. The authors make it a buy up to US$11 but in the short time since they went to press it has broken that barrier. It’s at $12.65, $12.15 in Toronto.
One foreign stock this advisory has held in its Income Portfolio for two years in Italian energy giant Eni SPA (NYSE-E; Italy-ENI). It has lost about 280,000 barrels of oil equivalent per day thanks to the troubles in Libya. But higher oil prices have made up for that.
Meanwhile it is heavily invested in major finds in the Gulf of Mexico, the Arctic, Venezuela, and in other parts of North Africa. Its shares fell in March as violence increased in Libya. They have since rebounded, but the yield is still an energetic 5.6 per cent. A buy up to $55, it trades at $50.22.
Veolia Environment (NYSE-VE; France-VIE) works in environmental services and transportation infrastructure in France. It yields 5.4 per cent on a $1.72 dividend and investors can get in on the payout if they act before May 18, say the authors.
The company slid during the recession, but profits have recovered and Veolia plans to sell some assets to cut debt as it raises operating income. A buy up to $38, it’s now at $32.40.
Not in the same boat
Spain may be in some financial difficulties, but its huge utility, Telefonica (NYSE/Spain-TEF) isn’t in the same boat. Its Latin American operations increased their revenue by 20 per cent in the fourth quarter, making up almost half of the company’s revenue.
The $1.72 dividend yields 7 per cent, but by 2012 it plans to push the dividend up to a level that would spell a yield of 10 per cent. Telefonica is a buy to $28, say the authors, and it’s trading at $24.35.
Over in Finland, Fortum (OTC-FOJCF; Finland-FUM1V) generates 86 per cent of its electricity from sources that don’t emit carbon dioxide, most of it from nuclear plants. Russia is one of its key expansion targets.
Fortum yields 4.3 per cent on its annual dividend of $1.42 (the last installment of which was paid on April 12). It’s a buy up to $35 and trades on the over the counter board at $32.60.
Israel’s mobile leader, Cellcom (NYSE/Israel-CEL) has just seen two new rivals approved by the Israeli government. That kicked its yield above 11 per cent as the shares slipped. They’ve recovered a little and the yield is 10.8 per cent on a $1.44 payout.
Cellcom remains number one in a country that has one of the highest rates of mobile phone usage in the world, at 125 per cent. A buy up to $32.50, it is trading at $31.89.
Singapore Telecom (OTC-SGAPY; Singapore-ST) has wireless subscribers in 25 countries and added 34 per cent to its numbers last year. The company’s “strong growth makes it a worthwhile holding for long-term investors,” say the authors.
What’s more, Singapore doesn’t withhold anything on dividends paid to foreign investors. The company yields 4 per cent on its $1.01 dividend and is a buy up to $25, which is where it stands today at $25.47.
The authors also explain that the ADR or OTC shares of overseas stocks can trade at different ratios to the “ordinary” shares on the home market. For Veolia, Telefonica and Cellcom, it’s a simple one-to-one ratio. For ENI, one ADR equals two ordinary shares. For Fortum, one equals five ordinary shares and for Singapore, it’s a one-to-10 ratio.
No such complications for Canadian shares, of course.
But whether U.S. income investors turn to Canada or much more exotic locations, a weaker dollar should be sending them abroad, these analysts say. And high yields and rapid growth should keep them there.
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