In Low-Yield World, Global Investors Turn To Big Dividend Foreign Stocks
Japan interest rates: zero.
European interest rates: zero.
U.S. interest rates: better. Closer to 3%.
But if you are not involved in the carry-trade, that is borrowing money from a low-yielding country like Japan and using it to buy high-yielding bonds in countries like Brazil, then the only way to get 3% interest on anything is in junk bonds.
Out of curiosity, I asked some fund managers to give me some stocks with a 5% or greater dividend yield. I didn’t want crazy penny stocks, and I didn’t want new, speculative industries like medical marijuana, artificial intelligence, or blockchain and crypto.
Nearly all of the names came from emerging markets.
One of the highest yielders? China.
Love them or hate them, China CITIC Bank International is the best yielding financial for a big bank. It pays 5.96% and is traded on the Hong Kong stock exchange in Hong Kong dollars, which is pegged to the U.S. dollar—so currency risk is low—and is up 7.89% this year.
“We just bought it recently. We have another rebalance of the fund coming up, and that stock will be staying in it. One of the reasons is that dividend,” says Eric Ervin, a fund manager for the Nasdaq RealityShares Next Gen China Fund (BCNA).
“If you go out of the Chinese banking sector, you won“t find yield like that,” he says. “All of our largest yielders are Chinese banks, and all pay over 5%,” he says, naming the Agriculture Bank of China (5.75%) and the Bank of China (5.57%) as the two others in the fund. “I wouldn’t bet the farm on Chinese banks,” he says. “But I wouldn’t ignore them, either.”
Plus they are dirt cheap. The Bank of America trades at around 10 times earnings. CITIC: 5.2x.
Everyone seems to love the financials when it comes to dividend stocks abroad.
“Bank Polska. I think it’s the best bank in Poland,” says Jin Zhang, portfolio manager, and senior analyst at Vontobel Quality Growth, a boutique investment firm within Vontobel Asset Management. The bank trades on the Warsaw Stock Exchange and is down 0.05% year to date.
The bank’s largest shareholder is the Polish government, with a 20% position. “Their Polish business has been solid; they have a dominant corporate sector for trade finance and all the important financial services that companies need. I just think they’re a great story,” Zhang says.
Poland’s economy is also better than most of Europe’s. Their economy grew around 4% in 2018, making it the European envy of President Trump when it comes to GDP growth rates. While the rest of Europe has had its ups and downs, with the FTSE Europe off by 8.95% since 2013, the Warsaw Stock Exchange Total Return Index is up 20%.
Still, out of three fund managers who discussed dividend payers, China seems like the place to be for all of them.
China highway toll operator Hopewell Highway Infrastructure is traded in Hong Kong, is up just 4.2% this year, but it has a dividend yield of 5.4%. As a growth stock, Hopewell has underperformed the MSCI Hong Kong because of a tender offer of shares last summer that didn’t go according to plan.
“We bought it a while ago, back when I was looking for diversification in Asia,” says Bryce Fegley, a fund manager for Saturna Capital. Fegley runs the Sextant Global High Income Fund (SGHIX), a balanced mutual fund. “Hopewell is not a Chinese monopoly, but they do have control over some infrastructure. So from a bottom-up perspective, they always looked pretty good to us.”
Most of the high yielders are emerging-market banks, natural resources and energy. Energy tends to be the most interesting because they are cyclical in nature, and their main commodity, oil, and gas, is priced in dollars. So if foreign oil and gas stocks are down in the dumps, there is a chance that it is cyclical, and it represents a good entry point for investors.
“It’s easier to be contrarian,” says Fegley, who mentioned Chinese oil firm CNOOC (CEO), an ADR with a 4.4% yield. “If you want to look at high yield you’re going to find most of them in emerging markets anyway,” Fegley says. “And if you want to limit some of the forex volatility, then energy stocks are better than financials. You just might not find 5% yield.”
Investors who are feeling particularly frisky and fearless can check out Russian oil firm Gazprom. Their London-listed shares yield 5.26%. Gazprom is one of the biggest natural gas producers and exporters in the world. The only problem is that its business faces sanctions and a worst-case scenario of its securities being banned from trading in the U.S.
Italy’s Eni SpA is a bit safer. Its dividend yield is a high 5.47%. The stock is also up 10% over the last 12 months. Meanwhile, FTSE Europe is down by the same amount.
Could they innoculate themselves from a continually unfolding EU political crisis?
“It’s really hard to predict that,” says Zhang. “We are bottom up, so what we try to do is own businesses that will do well in either situation,” he says of Euro zone breakups and Brexit and China trade wars.
“High-quality businesses have been around for decades. They know how to navigate crisis,” he says. Five-percent yield or less, the best companies are always thinking ahead. “They are positioning their company to gain market share when things turn sour,” he says. “I’m buying the companies that can do that. And if they pay a high dividend, it’s just a bonus for your investors.”