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With the opening of the Olympics last week, the world's
eyes have focused on China. Savvy investors have been
watching Asia's emerging giant for years now, and many have
profited handsomely. While there are undoubtedly many
worthwhile individual investments there, we think income
investors, on the whole, might do well to look elsewhere.
The Shanghai Composite Index offers an average dividend
yield of 1.5%. That's lower than London's FTSE, Germany's
DAX, our S&P and Brazil's Bovespa. Even Japan's Nikkei,
which is typically considered the lowest-yielding index in
the world, is paying 1.6%.
Chinese stocks have also shown extreme volatility and
are currently down about -53% year-to-date. With an average
earnings multiple of 19, these equities could easily have a
lot farther to fall. Stability and consistency afford the
income investor a margin of safety, and China offers little
of either right now.
Broadening Our Horizons
This is one of the reasons we
particularly like Israel. Its market has been much more
resilient, its earnings multiples are lower and its dividend
yields are higher. Its currency has also been stronger than
the yuan relative to the dollar, which magnifies returns for
U.S. investors.
While Israel can't match China's rapid +9% expansion,
Israel's economic growth, expected at an average +4.4% through 2012,
is still robust. Inflation is modest. And though political struggle and
ethnic strife may tend to dominate the headlines, lawmakers
there agree on an economic policy centered on restrained
government spending and foreign investment.
Israel exports
$50.2 billion worth of goods and services a year, enough to
give the country a $5 billion current-account surplus. Corporate tax rates are substantially lower than the
United States and are scheduled to decline even further in
2010. The tax system encourages unearned income (capital
gains, interest and dividends), and is generous toward
foreign investors and venture capital.
This favorable business climate has been good for the
market. The Tel Aviv 100 Index has gained +127.8% in the
past five years. That's a commanding performance against the
S&P 500, which reluctantly eked out a gain of just +25.7%
during the same
period.
On an annualized basis, the Tel Aviv index outpaced the U.S.
benchmark by a factor of six. And, as a bonus for growth
investors, the index has an average dividend yield of 3.2%,
besting the S&P's 2.3% and more than twice
what China has to offer.
Ring the Bell, Take the Money
One company we've found that is partly responsible
for setting that curve is a cellular and fixed-line phone
company that's paying an
11.9% dividend yield. We profiled this
outstanding company in this month's issue of our premium
income-investing newsletter
High Yield Investing.
The company ranks No. 1 in terms of subscribers, sales
revenue and cash flow. It controls 34% of the wireless
market and also provides fixed-line phone service to businesses.
Israelis love cell phones -- many have more than one
wireless phone, as is evidenced by the technology's 120%
penetration rate. But the market still has room to grow. It's population expands +2% a year -- higher than the world
average 1.2% -- and its economic growth rate is
even higher than that. An expanding economy with more and more
people translates into more being spent on wireless
services. And spend they do -- telecommunications accounts
for more than 4% of Israel's $185.9 billion economy.
The firm's most compelling revenue driver is
technology, which is enabling wireless customers to use their handsets for more
tasks, such as banking, e-mail, music
downloads and even videoconferencing. If the idea of a video
linkup on a cell phone is baffling, consider: Israel is a
young country. The median age is 29. These are people
who grew up using cell phones and are willing and able to
exploit the technology. The revenue generated from these
services is growing at an astounding +45% annual rate.
The company's dividend policy is to distribute at least
75% of annual net income to shareholders in quarterly
installments. Besides the regular dividend, management also
seeks to distribute at least 50% of earnings each year.
During the past year, the company paid out $3.93 per share.
That gives the stock a yield of 11.9% of today's share price
($3.93/$33.15).
Dividends are based on Israel's local currency, the New
Israel Shekel. In the past year, the shekel has gained more
than +20% against the dollar, providing an equivalent boost
in the value of the dividends for U.S. investors.
Subscriber growth and value-added services led to a
robust +56% annual earnings growth over the past year. Earnings are forecast to grow +20% this year and
average +10% growth in the next few years, largely because
of the company's data-service business. Voice services,
which contribute the lion's share of revenue, have been
growing at a steady +2-3% clip and are projected to continue
doing so in the years ahead.
These shares have enjoyed total returns of more than
+40% during the past year in a down market, but are still
attractively priced. They are selling at just 11 times next
year's projected earnings, which is a bargain considering
the double-digit dividend yield.
Income bolsters returns in
difficult markets
Israeli companies pay higher yields because they want to
attract capital to their economy. This is an
opportunity for your dollars to go where they will be
treated best -- with a double-digit yield and the extremely
likely potential for a substantial long-term capital gain.
These shares will earn you money while they're earning you
money. It's one of the
things we look for in our premium newsletter,
High-Yield
Investing.
Subscribe today and we'll send you the name of this
security, and provide you with monthly content and mid-month
updates to ensure you're always fully apprised of the best
income investments the world has to offer. To learn the name
of this security, click
here.
Join us next week as we take a trip to Eastern Europe.
Good investing!
-- Carla Pasternak
Co-Editor
Global Dividend Opportunities
GlobalDividends.com
839-K Quince Orchard Blvd.
Gaithersburg, MD 20878-1614
P.S.
-- Don't miss a single issue! Add our address, Editors@GlobalDividends.com,
to your Address Book or Safe List. For instructions, go
here.
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