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The answer is a resounding "yes."
Although they aren't easy to find and are exceedingly rare, China offers a
handful of high-yield stocks and funds worth considering for your
portfolio. These include a closed-end fund that not only trades right
here at home on the NYSE, but that also paid a dividend of $5.82 per share
last year.
I'll give you the name of that fund in a moment, but first I
want to address the tremendous potential offered by this
market...
With 1.3 billion citizens,
China is the world's most populous country. It is also the fastest-growing large economy in the world.
The nation's economy is expected to grow +6.5% in
2009, +7.3% in 2010, and more than +8% in subsequent
years.
But China's economic future wasn't always so rosy.
China began moving away from
a purely socialist economy in the late 1970s -- shifting away from
collectivist agriculture to family-owned enterprises. In the 1980s, the
central government began expanding private-property rights and allowed
prices for more goods and services to be determined by market forces. Capitalism began to take root in the formerly communist
land, and by the start of this century, China had a vibrant stock market and was
enjoying the benefits of retaining capitalistic systems in Hong Kong and
Macau.
Trade has been a powerful engine for Chinese economic growth. The government
strategically allocated resources toward light industry and technology,
using the country's combination of strong education but low wages to produce
high-quality, low-cost goods that it began shipping around the world. At the
same time, China created "special economic zones" in which foreign companies
were allowed to invest directly. Over time, more foreign companies began
outsourcing their production to China, with great success. China's entry
into the World Trade Organization in 2001 accelerated this trend -- as does China's ongoing policy of undervaluing its currency, the yuan, versus the
U.S. dollar. This makes Chinese exports cheaper to foreigners.
As a result of these policies, China's economy has grown tenfold over the
past three decades -- an astounding pace. Although it's now the
second-largest economy in the world after the U.S. (measured by
purchasing-power parity), China has continued to grow rapidly -- about
+11%, on average, over the past three years. Most economists expect that
rate to slow this year to +6-7%, though it's a bit difficult to estimate
Chinese GDP growth because of the number of state-owned businesses and the
government's control over information.
China Easily Outpaces the U.S.
Nonetheless, compare those projected growth numbers with estimates for the U.S.,
which is expected to post a -3.2% decline in GDP growth this
year. And while that growth rate might improve over the next several years,
it should continue to stay below +2.0% (see table).
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China's GDP Growth to Dramatically Outpace U.S. |
| |
2008 |
2009 |
2019 |
2011 |
2012 |
2013 |
|
China |
+9.0% |
+6.5% |
+7.3% |
+8.1% |
+8.3% |
+8.5% |
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USA |
+1.1% |
-3.2% |
+0.6% |
+1.5% |
+1.9% |
+2.0% |
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China isn't without problems; inflation is fairly high (around 5% currently), widespread poverty remains (especially in rural areas), and
labor costs are beginning to rise as skilled, experienced workers shop
around for better jobs in an increasingly competitive environment. In
addition, China faces expensive problems in the coming 10-20 years,
including the need for continued infrastructure construction and growing
pollution.
Even so, I think we're in the early stages of China's economic
boom, and I believe the country can continue to grow at a high single-digit pace
for the next decade. If that happens, then plenty of Chinese companies will
provide handsome returns for their shareholders.
Indeed, China's stock markets -- in Hong Kong and Shanghai -- have soared in
recent years along with the country's economy. Incredibly, the Shanghai
Composite rose from 1,000 in the summer of 2005 to above 6,000
in October 2007. The latter months of that bull market increasingly
resembled a bubble, and since then we've seen a healthy correction.
That has not only helped bring valuation levels back to earth (making
Chinese stocks more attractive), but it has also boosted dividend yields
among Chinese stocks (as share prices have declined, dividend yields have
gone up).
Finding High-Yield Stocks and Funds in China
For income investors, China is one of the hardest places on the planet to
find high yields. Only a small basket of Chinese stocks
(literally about a hundred) pay dividend yields above
3.0%. However, most of these yields are far lower than what
I generally go for -- stocks like oil refiner PetroChina (NYSE:
PTR) and wireless leader China Mobile (NYSE: CHL) both sport
relatively low 3.5% yields. Both arguably are attractive as long-term investments,
especially as their share prices
have come down from their highs. But for true high-yielders,
you have to dig deeper -- and pick carefully.
Only five individual Chinese stocks trade in the U.S. (making
them easy for domestic investors to purchase) and offer
dividend yields above 6%. Meanwhile, fewer than 10
China-focused funds deliver similarly high yields. But
even though this list of high-yielders is small, a few of
these securities offer tremendous long-term potential.
One good investment idea I've been following recently is The
China Fund (NYSE: CHN, $20.39). This closed-end fund
trades on the NYSE, so it's a snap for U.S. investors to
buy. Meanwhile, the fund offers diversified exposure to
a basket of over 60 Chinese securities. And despite its
recent rally, it's still trading at a nice -6% discount to its
net asset value (NAV).
On the income side of things, the fund has paid annual
distributions each and every year since its inception in
1992. However, those payments have been lumpy, to say
the least. The China Fund paid distributions of $5.82
per share in 2008 and $12.12 per share in 2007... but in 2004
and 2002 the fund paid almost nothing, delivering
distributions of just $0.05 and $0.21 per share,
respectively. The other catch is that a large chunk of
the fund's recent distributions have come from long-term
capital gains instead of dividend income. For example,
last year capital gains accounted for a full 92% of the fund's
distributions.
Although The China Fund might not deliver predictable
dividends year-in and year-out, it should continue to deliver
strong (albeit volatile) total returns as the Chinese economy
bounces back. But if you're hungry for high, dependable
yields in the fast-growing Chinese market, then I've got good
news for you. I'm finding plenty of highly predictable
dividend payers in China, and I'll bring you a closer look at
a few of these in future issues of Dividend
Opportunities.
Wishing you the best of success. Until
next week...
-- Carla Pasternak
Editor, Dividend Opportunities
P.S. -- To receive an immediate copy of "Carla Pasternak's
Five-Step Action Plan to the World's Highest Dividends" --
which includes her three favorite high-yield stocks and
funds in China,
visit this link.
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