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Is Mexico the new China?
Until recently, China was the “go-to” manufacturer of choice. Thanks largely to the country’s low wages, companies across the industrialized world were able to have their products produced cheaper in China than at home — or in Mexico.
The advantage known as the “China price” still sends tremors through hometown manufacturing facilities in much of the West.
But during the past decade the playing field has tilted.#-ad_banner-#
Ten years ago, Chinese wages averaged a quarter of those in Mexico. These days, according to The Boston Consulting Group, China’s average manufacturing wage tops Mexico’s, when productivity differences are taken into account.
Add to that the proximity to the world’s largest economy — an economy that’s again showing life — and the China price advantage loses even more luster. After all, shipping and travel between the United States and Mexico can be done at a fraction of the time and cost of doing business halfway around the world. Cultural barriers, moreover, are usually less of a hindrance between friendly neighbors than friendly nemeses.
Now, I’m not saying China is looking over its shoulder just yet (its economy is expected to grow 8.1% this year, more than double the still-respectable — and widely envied — rate of 3.5% in Mexico). But I suspect that China can feel something nipping at its heels.
So, viva Mexico! But what’s in it for us? How do we individual investors get a piece of that action?
For that we turn to the Mexico Fund (NYSE: MXF) — a stock that The Daily Paycheck’s Amy Calistri has called “the perfect vehicle” for income investors to potentially profit from a strong economy south of the border.
Mexico Fund is a closed-end fund that typically invests at least 80% of its total assets in equities listed on the Mexican Stock Exchange. Most of the rest is invested in issuers listed on the Mexican Stock Exchange but organized outside of Mexico with a Mexican subsidiary.
‘Mexico Fund’s single largest holding — at nearly 11% of net assets — is telecom service giant America Movil (NYSE: AMX). Based in Mexico City, American Movil is the largest telecom provider in Latin America, serving more than 250 million mobile customers in 18 countries.
When Amy first told her Daily Paycheck readers about the Mexico Fund in June 2010, Mexico Fund was trading at $23.94 a share and yielding 10.5%. On Thursday, Jan. 24, Mexico Fund was 33.2% higher at $31.89, about the same as the advance in the S&P 500 during the same period.
What makes Mexico Fund special is its yield (see more on ‘Mexico Fund’s yield in the Q&A section below). Amy’s collected about $1,330 in payouts stemming from her initial 150-share purchase two and a half years ago. Add it all up — including dividend reinvestment — and Amy’s total return on Mexico Fund comes to 79% through Thursday, almost double the 41.4% total return of the S&P 500.
Amy reiterated her recommendation of the Mexico Fund in the December 2012 issue of The Daily Paycheck, citing the country’s growing competitive edge in global manufacturing along with the expectation of a bigger payout in 2013.
In fact, the pace of growth among Mexico’s manufacturers rose in December for the third consecutive month, according to one measure. Reuters reported earlier this month that the HSBC Mexico Manufacturing Purchasing Managers’ Index rose to 57.1 in December, from 55.6 in November. The December reading was the highest since the survey was launched in April 2011, Reuters said.
Is it too late to get in? Let’s ask Amy…
Bob: The Mexico Fund posted a new 52-week high of $33.30 a share on Tuesday, Jan. 22. Are you still recommending this stock at these levels?
Amy: The fund has run up a lot in the last couple of months, but it is still trading at a discount to its net asset value (NAV). When it comes to buying a closed-end fund such as Mexico Fund, where it trades in relationship to its NAV can be more important than its price. So I would continue to recommend Mexico Fund as long as it trades at a discount to its NAV.
Bob: You mentioned in the December issue that the Mexico Fund has an unusual dividend policy.
Amy: Yes. The fund sets the dividend for the next year at 10% of the fund’s net asset value on the last trading day of the current year.
On Dec. 30, 2011, ‘Mexico Fund’s NAV was only $23.84 per share. In the year just ended, ‘Mexico Fund’s NAV was considerably higher at $30.81. This means the fund will be returning to near double-digit yield territory in 2013 — a factor that’s likely to drive even more demand for the fund as the word spreads. At week’s end, ‘Mexico Fund’s yield was about 7.5%
Bob: What is it about the Mexico Fund that makes it a prototypical Daily Paycheck holding?
Amy: To maximize income and minimize risk, The Daily Paycheck holds three types of income securities. I have a group of steady income securities that provide stability. I have a group of securities with fabulous track records for dividend growth and capital appreciation. My third group of securities offers high yields, but with slightly higher capital risk.
The Mexico Fund typifies what I look for when I select a security for my “High-Yield Opportunities” group. It has a strong record of funding its lofty dividend with capital gains and income. The fundamentals are strong and, in my opinion, represent more upside potential than downside risk.
[Note: At the moment there are 16 other holdings in the Daily Paycheck’s High-Yield Opportunities real-money portfolio, with an average yield of 9.4%. To hear a presentation from Amy in which she discusses her strategy in The Daily Paycheck, follow this link. For the text version, click here.]
Bob: What else is catching your attention at present, and what are you avoiding?
Amy: Since launching The Daily Paycheck in December 2010, it’s been a good environment for almost every income-producing asset class. But I think we may be entering a period when interest rate risk will be higher. As a result, I’ve started to increase my weight in equities and other asset classes that have good appreciation potential. For instance, I recently increased my holdings in the real estate sector. I will also start to trim back on some of my fixed-income holdings. If interest rates finally start to rise, I want to avoid long maturity, investment grade bonds. These are the bonds that will get pinched the most in a rising interest.
Action to Take –> But this will require only minor tweaking on my part. My goal is to find securities that I can hold — and reinvest in — during the long term. I tend to focus on resilient securities that don’t need a lot of babysitting every time the economic winds shift.
P.S. — If you want to know more about one of the most effective dividend strategies around, check out “The Dividend Trifecta.” Simply put, it’s a three-part approach to dividends that multiplies the effectiveness of every dollar you invest. Amy’s plan is specifically engineered for people who want to retire sooner or for those who would like to get a steady stream of extra income now. Go here to learn more (or if you prefer the text version, follow this link).