Dividend Stocks Trump Foreign Bonds: The Coca-Cola Company (KO), Banco Santander, S.A. (ADR) (SAN), Telefonica Brasil SA (ADR) (VIV)

Page 1 of 2

Traditionally, investors put money into stocks for capital appreciation and invest in bonds for income with capital preservation. Financial advisers routinely recommend investing in both stocks and bonds, a strategy that proved particularly prudent over the last 30 years, when bonds outperformed stocks. However, for those of us building our portfolios now, low interest rates make bonds look only marginally more attractive than a savings account. Low interest rates have made bond offerings possible for countries formerly shut out of international markets, and investors have happily bought up the debt of countries like Bolivia and Paraguay at yields under 5%.

The Coca-Cola Company (NYSE:KO)The capital preservation myth

Most sovereign debt carries a small default risk, but when a government defaults on its bondholders, the capital preservation perk of bonds disappears. Think Greece or Argentina: when the government defaulted, the governments gave bondholders new bonds with face values up to 70% lower than the original. Usually, default risk is priced into bond yields: medium-risk countries offer bonds with much higher yields than low-risk countries and high-risk countries are effectively locked out of bond markets by extremely high borrowing rates.

However, low interest rates have recently let countries with a high risk of default offer sovereign debt at historically low yields. For example, Bolivia sold $500 million in ten-year notes in October 2012, initially yielding 4.8%. Bolivia epitomizes a high-risk country: it set world records for inflation and coup prevalence in the 1980s and while Bolivia’s macroeconomic health has improved drastically, the current administration routinely nationalizes foreign and domestic companies. In other words, the country has a history of political and economic instability and a track record of appropriating foreign-owned assets.

Paltry income

Bolivia’s and neighbor Paraguay’s sovereign debt yields nearly 4.8%. For those who wish to go a notch down in risk, however, the yield falls considerably. In September, Brazil sold ten-year notes at a record low of 2.6%, or about .6% above the U.S. inflation rate. Brazil will offer ten-year notes again in the next couple weeks, with yield estimates around 3%. While Brazil shows no signs of defaulting, its economy is limping along at 1% GDP growth and a decades-long era of inflation, currency devaluations, and debt crises is only ten years behind it. Brazil is a medium-risk country, not the low-risk borrower that a 3% yield usually denotes.

Dividend stocks are a better bet

Dozens of companies operating throughout Latin America are at lower risk for bankruptcy than Bolivia is for default, and offer a higher dividend yield than Brazil’s bond yield. I argue that many of these companies offer better odds of capital preservation and income than Latin American foreign debt, and many of the region’s dividend stocks have plenty of room to appreciate as well.

Telefonica Brasil SA (ADR) (NYSE:VIV) is a Brazilian telecommunications megacap. Telefonica shares have a beta of .67, making the stock a good candidate for capital preservation. Even better, Telefonica comes with a gigantic 8% dividend, leaving Latin American sovereign debt yields in the dust and topping the dividend yields of most large U.S. telecommunications companies. Telefonica Brasil SA (ADR) (NYSE:VIV) trades at a price-to-book ratio of 1.36, leaving room for capital appreciation as well.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!