Top Yields Down Under:
Our Five Favorite High-Yield Stocks in Australia and New Zealand

When most people think of Australia, it conjures up many thoughts -- kangaroos, boomerangs, and the Outback. As for New Zealand, the first image that comes to mind is one of sheep -- they outnumber people 10 to 1 in the lush island nation. But as an income investor, you should think of one thing when you think of either country -- dividends.

Australia and New Zealand -- two often-overlooked economies that play important roles in the economy of the Pacific Rim -- boast some of the highest-yielding markets in the industrialized world.

As you can see from our chart, these countries present a dream opportunity for income investors. With an average yield of 7.3%, New Zealand's stock market boasts the highest average yield of any market in the world. Meanwhile, Australia clocks in with a 3.5% yield -- that is nearly double the paltry 1.8% yield of the United States.

And the best news of all? Our analysis says that yields in both nations are likely to rise in the future. After all, Australia and New Zealand are benefiting from the worldwide economic boom. Australia, with its rich natural resources, and New Zealand, with its agriculture are both seeing record high prices for their exports. Of course, this in turn means increased cash flows for business and increased dividends for investors. With no signs of a slowdown on the horizon, this cycle should be a boon for years to come.

Now that we've gotten your attention, let's dive a little deeper into the two nations that could power your income portfolio with rich, double-digit yields.

Australia
Australia, by far the larger of the pair, is growing smartly: about +4.5% in 2007 and a projected +3.8% in 2008, according to International Monetary Fund estimates.

The country benefits from its proximity to Southeast Asia's fast-growing economies. About 60% of Australian exports go to countries in Asia -- including raw materials such as copper, nickel and zinc and agricultural commodities such as wheat.

In fact, more important than its geographical position, Australia is rich in natural resources -- just as the prices of raw materials are enjoying a multi-year boom in demand. With inflation picking up in the U.S. and elsewhere around the world, shares of companies that own or produce agricultural or industrial commodities could be among the world's top performers.

Over the past five years, Australian stocks have an annualized return of +23.0%. And Australian companies tend to pay enticing dividend yields, so we've got plenty to choose from. The average Australian stock yields 3.5%, versus 1.8% for the average U.S. large-cap stock. And considering the fact that the Australian average yield calculation includes many stocks that pay no dividends at all, those paying dividends yield even higher than average.

New Zealand
New Zealand is much smaller than its Oceanic neighbor -- both in population and area. But its stock market has delivered mighty returns of late. Over the past five years, Kiwi stocks have surged +120%, and New Zealand's dollar has gained more than +30% against the U.S. dollar, creating a double-whammy of gains for U.S. investors.

One of the world's most beautiful countries, New Zealand is a tourist haven -- but its economy is an overlooked dynamo. Its economy is based on agricultural exports, including meat, seafood and wool -- but especially dairy products. New Zealand accounts for one-third of the world's dairy trade, and it's benefiting significantly from rising milk prices worldwide.

New Zealand also has dynamic tourism, financial services and specialty services industries (including film production). The country has significant natural-gas reserves, which help supply its own energy needs. Like Australia, New Zealand is benefiting from the general economic boom in Asia; unemployment recently stood at only 3.6%.

New Zealand also has the world's highest-yielding stocks -- more than 7%, on average. That's partly thanks to a quirk in New Zealand law that benefits U.S. investors. New Zealand withholds 15% of dividend income paid to most non-resident shareholders -- including those from the U.S. -- however, the country subsidizes companies who decide to increase their payout to non-residents to compensate for the 15% withholding. Because U.S. shareholders can still retrieve the 15% withheld by requesting a foreign tax credit, the net effect is a significantly higher dividend.

And best of all, buying stocks in Australia and New Zealand is relatively easy. Most international brokers offer exposure to both countries, and quotes are readily available from both the Australian Securities Exchange and the New Zealand Exchange.

With these points in mind, we set out to find the most attractive stocks in both of these high-yielding markets. Our search uncovered dozens of potential winners, which we finally whittled down to a select few. . .