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This High-Yielder is Up 79% in 2 Years and It's Still a Buy
1/28/2013 11:00:00 AM
Is Mexico the new China?
Until recently, China was the "go-to" manufacturer of choice. Thanks largely to the country's low wages, companies across the industrialized world were able to have their products produced cheaper in China than at home -- or in Mexico.
The advantage known as the "China price" still sends tremors through hometown manufacturing facilities in much of the West.
But during the past decade the playing field has tilted.
Ten years ago, Chinese wages averaged a quarter of those in Mexico. These days, according to The Boston Consulting Group, China's average manufacturing wage tops Mexico's, whenproductivity differences are taken into account.
Add to that the proximity to the world's largesteconomy -- an economy that's again showing life -- and the China price advantage loses even more luster. After all, shipping and travel between the United States and Mexico can be done at a fraction of the time and cost of doing business halfway around the world. Cultural barriers, moreover, are usually less of a hindrance between friendly neighbors than friendly nemeses.
Now, I'm not saying China is looking over its shoulder just yet (its economy is expected to grow 8.1% this year, more than double the still-respectable -- and widely envied -- rate of 3.5% in Mexico). But I suspect that China can feel something nipping at its heels.
So, viva Mexico! But what's in it for us? How do we individual investors get a piece of that action?
For that we turn to the MexicoFund ( MXF ) -- astock thatprofit from a strong economy south of the border.
Mexico Fund is aequities listed on the Mexican Stock Exchange. Most of the rest is invested in issuers listed on the Mexican Stock Exchange but organized outside of Mexico with a Mexican subsidiary.
Two of Mexico Fund's top holdings in the latter category include retailer Wal-Mart de Mexico, at 6.5% ofnet assets at year end, and consumer products company Kimberly-Clark de Mexico, at more than 3.7% of net assets.
'Mexico Fund's single largest holding -- at nearly 11% of net assets -- is telecom service giant America Movil ( AMX ) . Based in Mexico City, American Movil is the largest telecom provider in Latin America, serving more than 250 million mobile customers in 18 countries.
When Amy first told her Daily Paycheck readers about the Mexico Fund in June 2010 , Mexico Fund was trading at $23.94 a share and yielding 10.5%. On Thursday, Jan. 24, Mexico Fund was 33.2% higher at $31.89, about the same as the advance in the S&P 500 during the same period.
What makes Mexico Fund special is itsyield (see more on 'Mexico Fund's yield in the Q&A section below). Amy's collected about $1,330 in payouts stemming from her initial 150-share purchase two and a half years ago. Add it all up -- includingdividend reinvestment -- and Amy's total return on Mexico Fund comes to 79% through Thursday, almost double the 41.4% total return of the S&P 500.
Amy reiterated her recommendation of the Mexico Fund in theissue of The Daily Paycheck , citing the country's growing competitive edge in global manufacturing along with the expectation of a bigger payout in 2013.
In fact, the pace of growth among Mexico's manufacturers rose in December for the third consecutive month, according to one measure. Reuters reported earlier this month that the HSBC Mexico Manufacturing Purchasing Managers'Index rose to 57.1 in December, from 55.6 in November. The December reading was the highest since the survey was launched in April 2011, Reuters said.
Is it too late to get in? Let's ask Amy...
Bob: The Mexico Fund posted a new52-week high of $33.30 a share on Tuesday, Jan. 22. Are you still recommending this stock at these levels?
Amy: The fund has run up alot in the last couple of months, but it is still trading at anet asset value (NAV ). When it comes to buying a closed-end fund such as Mexico Fund, where it trades in relationship to its NAV can be more important than its price. So I would continue to recommend Mexico Fund as long as it trades at a discount to its NAV.
Readers can keep tabs on 'Mexico Fund's net asset value by going to the websitefunds , including premium/discount information.
Bob: You mentioned in the December issue that the Mexico Fund has an unusual dividend policy.
Amy: Yes. The fund sets the dividend for the next year at 10% of the fund's net asset value on thelast trading day of the current year.
On Dec. 30, 2011, 'Mexico Fund's NAV was only $23.84 per share. In the year just ended, 'Mexico Fund's NAV was considerably higher at $30.81. This means the fundwill be returning to near double-digit yield territory in 2013 -- a factor that's likely to drive even more demand for the fund as the word spreads. At week's end, 'Mexico Fund's yield was about 7.5%
Bob: What is it about the Mexico Fund that makes it a prototypical Daily Paycheck holding?
Amy: To maximize income and minimize risk, The Daily Paycheck holds three types of income securities. I have a group of steady income securities that provide stability. I have a group of securities with fabulous track records for dividend growth andcapital appreciation . My third group of securities offers high yields, but with slightly higher capital risk.
The Mexico Fund typifies what I look for when I select a security for my "High-Yield Opportunities" group. It has a strong record of funding its lofty dividend with capital gains and income. The fundamentals are strong and, in my opinion, represent moreupside potential thandownside risk .
Bob: What else is catching your attention at present, and what are you avoiding?
Amy: Since launching The Daily Paycheck in December 2010, it's been a good environment for almost every income-producingasset class . But I think we may be entering a period when interest rate risk will be higher. As a result, I've started to increase my weight in equities and other asset classes that have goodappreciation potential. For instance, I recently increased my holdings in thereal estate sector. I will also start to trim back on some of myfixed-income holdings. If interest rates finally start to rise, I want to avoid longmaturity ,investment grade bonds . These are the bonds that will get pinched the most in a rising interest.
Action to Take --> But this will require only minor tweaking on my part. My goal is to find securities that I can hold -- and reinvest in -- during the long term. I tend to focus on resilient securities that don't need a lot of babysitting every time the economic winds shift.