Where The Market's Highest Yields Are Hiding


"The Dividend Party Is Just Getting Started on Wall Street"
"It's Time to Cash In On Dividends"
"The World's Biggest Companies Pay Out $1 Trillion in Dividends"
(a new world record)

Those were some headlines I saw on CNBC in the past couple weeks. That's just a sample, too. Lately, the financial news has been flooded with experts touting the virtues of owning reliable dividend-paying stocks.

Normally, we would recommend you take these "experts" opinions with a grain of salt. After all, most major media conglomerates are so politically driven that they usually fail to provide any actionable investing advice to begin with.

But, that said, we would be lying if we told you we disagreed about the future of the dividend market. Truth be told, we -- like those experts on CNBC -- firmly believe dividend stocks will remain some of the market's best performers over the next several years.

Here's why...

#-ad_banner-#Historically speaking, dividend stocks do well when interest rates are low. That's because low rates tend to reduce the returns on traditional income investments like bonds, savings accounts and certificates of deposit. In order to offset the decrease in investment income, people move their money into dividend stocks in search of higher returns.

We've seen this trend play out over the past few years...

As you can see from chart, while interest rates (represented by the 10-year Treasury yield) have fallen, dividend stocks have soared.

And it's unlikely that trend is going to change anytime soon...

Ben Bernanke reaffirmed this theory a few weeks ago, when the (now former) Federal Reserve chairman told reporters at his regular FOMC press conference that interest rates could remain at or near zero through at least mid-2015. He even said that when the Fed does decide to raise rates, the most it would consider is a paltry 0.5% to 1.0% increase.

That means the Fed is all but guaranteeing investors will enjoy a dividend-friendly environment for at least the next year and a half.

Of course, as with everything in investing, half the battle when it comes to dividend stocks is finding good deals to begin with. After all, it's not enough to simply buy those dividend payers with the highest yields or the lowest payout ratios. Such one-sided approaches typically end in disaster.

So what's the best way to search for the market's best dividend stocks -- ones that promise to capitalize on the momentum in the dividend market and provide protection in the event of a downturn?

In his March issue of High-Yield Investing , Nathan Slaughter looks to the emerging markets.

As Nathan notes, the currency problems in countries like India, Turkey and Argentina have many investors fleeing from developing economies around the world.

But, as Nathan claims, this "crisis" should prove nothing more than a temporary setback...

The problem, as Nathan explains, is the fear of rising interest rates. See, over the past few years investors have been borrowing money in the U.S. -- where interest rates have been historically low -- and investing them in countries that earn higher returns.

With the Fed's taper starting to take effect, some investors fear this trade may no longer be profitable...

Yield-hungry investors have spent the past few years borrowing low-cost dollars and then reinvesting them in higher-yielding emerging markets overseas. That might mean putting the proceeds into a dividend-paying stock in South Africa, a corporate bond in Poland, or sovereign debt in Malaysia.

The strategy yields easy profits -- until something upsets the delicate balance. You can't net a profit until whatever currency you're holding is converted back into greenbacks. And earning a rich yield of 5% or 6% overseas doesn't mean much when the underlying currency drops 8%.

Once the liquidity spigot that had greased the carry trade closed, the party that had been in full swing came to an abrupt end, with participants tripping over themselves to reach the exit first.

What we're seeing now is a hangover -- pure and simple. Too many investors over-imbibed on arbitrage and are now paying the consequences, wishing they had shown more restraint. Hangovers are no laughing matter. But I've noticed something: No matter how painful, they don't last. Most are a distant memory before long.

He goes on to say emerging economies are expected to grow 5.4% in 2014 -- more than double the pace of the 2.1% growth expected in developed countries. Plus, right now these nations have substantially lower debt-to-GDP ratios than their developed counterparts, and it's easy to see why Nathan thinks now's the perfect time to start honing in on high-yield emerging market plays.

Nathan isn't the only StreetAuthority analyst bullish on emerging markets either. In his February issue of High-Yield International , Michael Vodicka makes a compelling case for investing in Hong Kong:

Hong Kong is the second most business-friendly country. It's an easy place for foreigners to open a local business, it's politically stable, and it operates within a strict and efficient legal environment.

These pro-business policies have transformed Hong Kong into the most competitive economy in Asia, with an unemployment rate of just 3.3%. It also makes Hong Kong the third largest recipient of foreign direct investment ( FDI ) in Asia behind only China and Japan, according to the Hong Kong Trade Development Council.

Hong Kong is coming off a rebound year for its economy. The country is expected to log 3% GDP growth for full year 2013, up from 1.5% in 2012. Looking forward into 2014, the International Monetary Fund ( IMF ) forecast another year of 3% or higher GDP growth.

But despite the positive outlook, Hong Kong stocks look undervalued. The H-Share Index trades at a price-to-earnings (P/E) ratio of just 7 times earnings, making it the cheapest benchmark in Asia. Its Hang Seng Index is trading at just 10 times earnings. That is a 33% discount to the S&P 500's 15.5 times.

As Michael goes on to explain, those low valuations are currently presenting investors with a great opportunity to pick up quality Hong Kong-based dividend stocks at fantastic prices.

Specifically, in his issue, Michael told his subscribers about one of Hong Kong's largest telecom providers, which is currently posting a 6.7% dividend yield -- significantly higher than U.S. telecoms like Verizon (NYSE: VZ ) and AT&T (NYSE: T ).

What's more, Michael thinks additional dividend hikes are also in this company's future. In the past three years, this telecom has averaged a 31% dividend growth rate, increasing its dividend 27% in 2011, 47% in 2012 and 18% in 2013. If history is indicator, 2014 will likely prove another positive year for this company's income investors.

Yet despite having a convincing growth story and paying a 6.7% yield, right now this company is trading at a price-to-earnings (P/E) ratio of 11 -- a sharp discount to the S&P 500's P/E of 15.5. As a result, Michael thinks this stock is a good conservative play for income investors willing to venture into the high-yield world of international investing.

[Of course, out of fairness to Michael's readers, I can't give that high-yielder away. You'll have to become a High-Yield International subscriber yourself to take advantage of that opportunity.]

Put simply, if you're looking for the best dividend stocks on the market right now, you'd be making a big mistake to not look overseas.

P.S. -- The truth is, most investors have no idea that four out of five stocks with dividend yields over 12% are found outside of the United States. Most may also be unaware of how strong growth has been abroad, which helps explain why the typical investment in Michael Vodicka's High-Yield International portfolio has gained an average of 62%.

Most importantly, many investors don't know that there are international high-yield stocks traded right on the New York Stock Exchange. To learn how to get started on your own high-yield international portfolio -- and to get several free names and ticker symbols -- be sure and watch this special presentation .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.

This article appears in: Investing , Stocks

Referenced Stocks: FDI , IMF



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