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

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

The 10 Biggest Outlet Malls in USA

The 5 Most Popular Rap Songs of All Time

The 10 Countries that Eat the Most Meat

The10 Most Expensive Countries to Fly To

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!