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Foreign
Debt Pays Big Dividends |
Published:
January 28, 2008
Turmoil
in U.S. stocks sent investors fleeing to the safety of
government bonds in 2007. According to Merrill Lynch (NYSE: MER),
U.S. Treasuries outpaced stocks for the first time in five
years, returning +8.7% versus the S&P 500's total returns of
5.5%.
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Strong demand for ultra-safe Treasuries pushed yields lower,
with the 10-year Treasury now yielding below 4%. By contrast,
foreign Treasuries are offering safe yields at better rates.
Australia's 10-year Treasury now pays over 6%, while you can get
nearly 8% on India's 10-year government bond and 9% on South
Africa's -- all are considered investment grade. For slightly
more risk, you can get 13% on a 5-year Brazilian government
bond, rated just a notch below investment grade.
In addition to their high yields, some foreign government and
corporate debt issued in local currency can offer a safe haven
against the falling dollar. Brazil's real rose +19% last year
against the U.S. dollar, boosting the value of Brazil's
real-dominated bonds by the same amount for a U.S. investor.
Plus, foreign bonds are one of the few assets that are
relatively safe from the subprime mortgage woes that have
pressured U.S. stocks. And like U.S. Treasuries, they trounced
the S&P 500 by a wide margin.
What to Look For in Foreign Bond Funds
While foreign bonds are not easily purchased by individual
investors, foreign bond funds offer a simple way to invest in
fixed-income securities around the world. With their
multi-million dollar portfolios of foreign bonds, these funds
will give you access to diverse foreign markets while also
reducing country-specific risk.
To Hedge or Not to Hedge
In searching for higher-yielding foreign bond funds with solid
payouts, we included two types of funds -- those that benefit
from U.S. dollar weakness by holding bonds in local currencies
and those that tend to provide more stable returns by investing
in U.S. dollar-denominated foreign bonds. We also considered
whether the fund invests mainly in a diverse portfolio of bonds
from a variety of countries or focuses on specific parts of the
world.
Emerging Markets
We also zeroed in on emerging market debt funds. Some investors may
dismiss emerging markets as too volatile for their taste.
But the fact is, the economies of countries like Brazil, Russia,
India, and China (the so-called "BRIC" nations) have become
stronger and more stable, with healthier balance sheets.
As a result, the credit quality of many emerging countries
continues to improve, with over half of them now rated
investment grade. In fact, some cash-rich emerging countries in
the Middle East and Asia are using their foreign-currency
reserves in sovereign wealth funds to purchase large stakes in
more developed nations like the U.S.
While
there are numerous funds that invest in international bonds in
the list below,
returns can vary depending on the markets they invest in,
whether their holdings are in local currency or dollar
denominated, the credit quality of their debt portfolio, and a
host of other factors such as management's experience and
investment style, expense ratios, and fees. . .
Important Note: In the
remainder of this article,
High-Yield Investing
editor Carla Pasternak provides a table listing 12 of the best
international bond funds available -- some yielding as high as 9.4% with
relatively low risk. In addition, all are easily purchased on a
U.S. exchange. However, in order to view the
remainder of this article, you'll need to subscribe to our
premium income investing newsletter --
High-Yield Investing. After you
subscribe, you'll receive immediate access to this full article,
as well as our monthly
High-Yield Investing newsletter and a
host of additional premium content. Please visit one of the
following links to continue.
Good investing!
Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com
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Income Security
of the Month
Our "Income Security of the Month" for August 2008 invests in a
fast-growing overseas market that doesn't get much exposure in the
mainstream financial press. And although it typically makes enormous
annual dividend payments -- it has paid an average dividend of
25.5% per year over the past five years -- this fund is perhaps
most appealing for its total return potential. Specifically, the
fund has delivered total returns of +178.9% since 2003,
and it ranks in the top 10% of its category over the past decade.
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