Sky-High Yields From an Island Smaller than Manhattan

Carla Pasternak's picture

Monday, December 28, 2009 - 8:28am

by Carla Pasternak

Here I sit, bundled up in a turtleneck shirt and bulky sweater. The trees outside my window have lost their leaves and my lawn has turned a brownish green. As I look out at this stark scene, my mind wanders to the warm sunny beaches of Bermuda, about 1,100 miles off the coast of South Carolina and worlds away from the approaching winter.

I can't resist checking out a few getaway packages... but I've discovered something just as enticing as Bermuda's sunny beaches: its economy.

Bermuda is smaller than Manhattan but enjoys the third-highest per capita income in the world -- over 50% higher than that of the United States.

How can that be? Is Bermuda that popular as a tourist destination?

A little more investigation shows there's much more to this British territory than tourism. That's the island's second-largest industry. So what's the first?

Bermuda is practically a synonym for "tax-haven." The country has no income or corporate tax, no capital gains tax, no sales tax.

Thanks to that favorable tax regime, Bermuda is host to some 1,500 global companies, including the world's top insurers and shippers. So, besides its beautiful beaches, the banking and accounting services these firms require are what really power this place. Financial services, in fact, is Bermuda's number one industry.

Now, here's where the story gets interesting. I don't really care about what fuels Bermuda's economy. I do perk up, though, when I see that some of the global insurers and shippers that call the island home and require its financial services can offer me yields of up to 13%!

Plus, the yields are tax-advantaged. You see, the "tax haven" Bermuda offers isn't just for big businesses. It's also for the little guy.

Foreign withholding taxes (tax automatically withheld from many foreign dividends) can chop off as much as 30% from your dividend income if they're not reclaimed through a tax deduction. But there's no foreign withholding tax on Bermudian dividends. The dividend a Bermuda-based company declares is the dividend you get. No strings attached.

Here's another advantage. The Bermudian dollar is pegged to the U.S. dollar 1:1. One Bermudian dollar equals one U.S. dollar. You don't need to worry about the effects of currency volatility or exchange rates on the value of your investment income when translated back into U.S. dollars.

So how can you tap into this high-yield, tax-free, currency-equivalent market?
 
Unfortunately, Bermuda-exchange listed stocks are hard to trade for the U.S. investor. I just got off the phone with a couple of the more popular brokerage firms with global trading desks, including Schwab and Interactive Brokers.

Schwab tells me they don't do Bermuda. "It's too small a market for us to develop a relationship with," a Schwab rep explained. Another rep at Interactive Brokers was a bit more blunt: "We do not route to Bermuda and won't offer it in the near future."

Not to worry.

You see, many of the highest-yielding global leaders are headquartered in Bermuda but listed right here in the United States.

The roster includes high-yield shippers like Nordic American Tanker (NYSE: NAT).

But there's more than just shippers. You can also access the high-yield/investment-grade preferred stocks of Bermuda-based insurers like XL Capital (NYSE: XL) or RenaissanceRe (NYSE: RE) -- all without leaving the familiarity of the U.S. markets.

High-yield Bermudian plays like these might just make the winter a little more tolerable.

P.S. -- In my December issue of  High-Yield International, I offered my subscribers seven potential income plays from Bermuda. My highest-yielding pick came from a financial services company that pays nearly 13%.

To see my full listing of Bermudian income plays, simply subscribe here. You'll also have access to every back issue we've ever published, plus monthly issues of High-Yield International.

Carla Pasternak does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.