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

5 Least Expensive Cities in the World

Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How 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

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!