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The Best Dividend Plays in the
World Are Now on Sale
By Evaldo Albuquerque, Editor, Exotic FX Alert
“Be Afraid.”
That’s what you will see on the latest cover of the Economist magazine. Besides that gloomy statement, it also has a picture of a black hole, as the article suggests that’s the destination of the global economy.
Strange as it sounds, that’s great news for stock investors.
When I see headlines like this, I always think that stocks are moving back into the buy range. Popular magazines, such as The Economist, try to maximize their sales by publishing cover stories that are popular at the moment.
So when something appears on the cover of a magazine, it usually means the investment story – while still important – has been priced into the market for now.
Although it’s impossible to pick the exact market bottom, I think now is a good time to be slowly buying stocks again, to start racking up the dividend income. As Warren Buffet once said, we should be greedy when others are fearful.
There’s no place better to be greedy than emerging markets. That’s where you can grab double or triple-digit gains, especially after such a significant sell-off like we’ve seen since August.
And the potential capital gains aren’t the only great thing about these markets. You can also find great income plays. Even better, they also provide protection against the declining dollar. Let me explain…
The Best Place to Find Bargains
It’s no secret that stocks are suffering around the world. Some places have suffered more than others. Although most of today’s global economic problems can be traced to developed nations, emerging market stocks have also been dropping as traders have dumped everything the least bit “risky.”
Investors are scared. They are simply fleeing those markets, as evidenced by 10 straight weeks of capital outflows in emerging-market equity funds. Just the last week, data shows investors have withdrawn about $3.3 billion from those funds.
Over the past year, many emerging market indices have dropped by more than 20%.
The chart below, for example, shows the performance of the indices in Turkey (blue line), Brazil (gray line), and Singapore (red line).
Use the Recent Drop in Emerging Market Stocks to Find Bargains
Keep in mind that these are stock indices. There are many stocks in those countries that have dropped more than the overall market. Some have fallen by over 50%.
That’s one of the reasons I’m putting emerging market stocks on the top of my buying list right now. But there are other reasons to be excited about picking up stocks on the cheap right now.
Keeping the Tradition to Rally
Most stocks in emerging markets tend to be more volatile than U.S. stocks. So when things get really bad, stocks in those nations tend to fall more than domestic stocks.
In the past two decades we had many crises where emerging market stocks fell way more than stocks in developed nations. More precisely, we had six major equity retreats around the globe in the last 20 years.
According to data compiled by Bloomberg, the peak-to-trough drop in the emerging-market index was, on average, 12 percentage points bigger during those six retreats.
But that also applies to the upside. Once emerging market stocks bottom, they tend to rally much more than stocks in developed nations.
Brazil provides a good example. After bottoming in late 2008, the Brazilian stock index rallied by over 120%.
So once we see a bottom in global markets, I expect emerging market stocks to outperform once again. It’s impossible to pick the exact bottom. But after such a significant drop, stocks are looking cheap. Many are trading at single digit P/E ratios.
And there’s one more reason to focus on these hated markets…
Dividends: The Icing on the Cake
Investors have traditionally turned to emerging market stocks for higher growth and potential for capital gains. But now some of these stocks are also turning into great income investments.
In these markets, you can easily find mature businesses that have been paying dividends year after year. In fact, a lot of these foreign companies have raised their dividend payout ratios to attract foreign investors, like you.
Besides that, when you buy a foreign stock that pays a high dividend, you’re essentially getting paid to diversify away from the dollar.
After the company pays you a dividend in an emerging market currency and you translate it into dollars, you end up getting a higher payout when the dollar falls. So this is a great way to hedge your portfolio against the long-term dollar decline.
In short, I see big opportunities in emerging markets shaping up. The positive long-term outlook of those nations should result in great capital gains in the years ahead. And with the income they provide, you can protect your capital from the dollar’s loss of purchasing power.
The countries that I mentioned above, Brazil, Turkey and Singapore, are a great place to start.
They all have solid fundamentals that should continue to ensure healthy economic growth in the long-term. Many of their local stocks have gone through a big correction.
Their currencies have also just gone through a significant correction. In other words, now is the time to start buying stocks in those cheap markets. Beside the capital gains, you will also get some extra income denominated in solid currencies.
And remember, when magazines like The Economist tell you to be afraid, that’s the moment to start looking for stocks on the cheap.
Best Regards,
Evaldo Albuquerque
Editor, Exotic FX Alert
P.S. While we’re waiting for stocks to rally, we are already seeing some incredible plays in foreign currencies. Forex traders have been having a field day with all the volatility lately. Regardless of whether stocks rally quickly or not, you will find opportunities trading in the Forex market. For more details on my best plays, click here.
