The Secret "European Aid Program" Making Millions for Investors

       On June 5, 1947 the U.S. Secretary of State delivered a commencement address in the famous Harvard Yard. In a move that's almost unthinkable in modern politics, the Secretary chose this venue in an effort not to attract significant attention from the press.

       You see, the Secretary's words were intended to kick off a major new policy initiative for then-President Harry S. Truman. But President Truman suspected that the new policy would be met with significant initial resistance from the U.S. public and several prominent members of Congress.

       Nonetheless, Secretary George Marshall's low-key speech that day has gone down in history as among the most pivotal in American history. Marshall stated that the U.S. should do whatever necessary to assure economic stability in Europe; without economic stability there could be no long-term sustainable peace.

       World War II devastated Europe's major economies. The destruction of roads, water pipes, and train networks during the war years left Europe with little functional infrastructure. My own grandparents and other relatives from their generation were spread throughout Europe at the time, and I'll never forget the stories they told me of how difficult life was in those early post-war years. Major cities and commercial centers, including London and Berlin, were either destroyed or badly damaged during the war. Even worse, the chaotic immediate post-war era encouraged lawlessness and corruption; no effective modern economy can exist without the rule of law.

       Truman, Marshall, and some prominent congressional leaders were keen to avoid a repeat of the chaotic era that followed World War I. In those years, widespread economic strife and suffering helped pave the way for the rise of fascism and, to some extent, World War II.

       Thus, thanks to the Marshall Plan, between 1948 and 1951, aid from the U.S. to Europe totaled $13 billion -- a sum equivalent to more than $105 billion in 2007 dollars. As a result of this aid, as well as a number of other important factors, most European economies stabilized and economic growth finally began to accelerate. As you can imagine, the Marshall Plan was not only good for economic and political stability, it was also a bonanza for businessmen and investors with exposure to the region.

       Of course, Western Europe is no longer the growth dynamo is was in the late 1940s -- so investors are keen to look elsewhere. Luckily, there is a second sort of Marshall Plan underway at this very moment -- billions of dollars of aid and reconstruction money are pouring into a single region of the world. 

       This "Marshall Plan 2" promises to be every bit as profitable for investors as the rejuvenation of post-war Europe. Ironically, this time the Marshall Plan is being administered by the European Union (EU), and the beneficiaries of that aid are the formerly communist states of Central and Eastern Europe.

       The parallels are undeniable. The economies in most Eastern European countries were devastated in the late 1980s and early 1990s in much the same way as their Western European counterparts were in the 1940s. Most had been propped up, to some extent, by aid from the former Soviet Union. Law and order was maintained by often-brutal police forces and militaries backed up powerful central governments and a single communist political party.

       And even with all that aid, living standards were a fraction of those that prevailed in Western Europe. For example, most economists believe that in 1991, about one year after Germany was re-unified, the formerly communist East Germany had a GDP per capita of only 31% of the level that prevailed in West Germany. By 1999, that ratio had risen to only about 55%.

       The collapse of the Soviet system in the late 1980s and early 1990s also brought other non-economic problems. For example, the end of central planning led to a lack of law and order and the rise of organized crime in some states. This situation was not unlike Western Europe in the 1940s.

       But that's all changing. The formerly communist eastern states are no longer centrally planned dinosaurs; most are now members of the European Union. As part of EU accession, the line of demarcation between east and west is becoming ever more blurred -- citizens of Eastern Europe can now travel freely in the west. And over time, labor restrictions are falling, allowing workers in these nations to gain employment in other countries of the EU.

       And of course, the newest members of the EU are the direct beneficiaries of a new sort of Marshall Plan -- EU aid funds designed to help grow the economies of the east to levels more in-line with those of Western Europe. Europe offers a number of programs designed to help bridge that wealth gap. These include near-total financing for infrastructure projects like roads and modern water and sewage facilities. So-called "structural funds" are also available for projects as diverse as workforce training and rural development.

       As my chart shows, the preliminary EU budget for the period from 2007 to 2013 shows a steady growth in EU spending on cohesion funds for emerging European nations. These cohesion funds are designed to promote growth, jobs, and development in the EU.

       This chart may look somewhat unbalanced, with Poland getting the bulk of EU cohesion funding. But remember that Poland is the largest of the new EU states in population terms, with close to 39 million people. Bulgaria, for example, has a population of just 7.3 million and will receive over one-half billion euros ($730 million) in cohesion funds for 2007 alone and some 6.9 billion ($10.1 billion) over the 2007-2013 period. That's a considerable sum -- far more on a per-capita basis than was dispensed under the original Marshall Plan.

       And all of the new EU States are expected to eventually join the euro currency bloc. To adopt the euro, these states need to meet certain stringent fiscal criteria covering factors such as government spending, inflation, and accounting standards. So the developed western states are not only offering aid, but also building developed financial and political standards.

       With all of these factors in mind, Eastern Europe offers an attractive combination for investors. The region is growing at rates similar to most other emerging markets around the world. At the same time, due to the adoption of EU law and fiscal discipline, these nations offer currency and political stability of the sort typically found only in developed nations.

       And EU aid certainly isn't the only reason to be interested in Eastern Europe. Here are just a few additional reasons why the region should see strong growth in the coming years . . .

       Relatively Low Wages -- Many Eastern European nations have become important centers for manufacturing and other labor-intensive industries. The reason is simply that skilled labor in the east is available at wages of 30-50% lower than what the same laborers would cost in developed Western Europe.

       In addition, labor market restrictions are onerous in many Western European markets including Germany and France -- there are high minimum wages, powerful labor unions, and strict limits on hiring and firing. Such restrictions are less apparent in the east.

       Firms based in Western Europe, the U.S., and elsewhere have located factories in Eastern Europe to take advantage of lower labor costs. For example, General Electric (NYSE: GE) has been a huge investor in Hungary and now operates a total of 8 factories there producing lighting equipment. Volkswagen, Hyundai, and Peugeot have all opened major factories in Slovakia, producing cars for both the western market and for delivery elsewhere in the east. Meanwhile, Japanese carmaker Toyota (NYSE: TM) has also gotten into the act by opening a factory with Peugeot in the Czech Republic; the plant will focus solely on the production of smaller cars for sale in the EU's newest member states.

       Growing Markets -- Economic growth potential also attracts foreign investment. My chart shows gross domestic product (GDP) growth in the U.S. versus the average growth rate for Eastern Europe as a whole. As you can see, it's clear that these foreign economies are growing far more quickly than our developed market.

       All that economic growth spells a large, growing market of consumers with growing disposable incomes. Sales of automobiles, consumer electronics, and all sorts of apparel are already picking up in these countries. Retailers from all over the world have been keen to set up a presence in the region to take advantage of that growth potential -- that spells more investment for the region.

       Favorable Tax Regimes -- Many governments in Eastern Europe have set up favorable tax and regulatory policies to attract investment. Some, such as Estonia and Slovakia, have instituted a flat tax regime for corporations and individuals. Other nations have set up special economic zones or highlighted specific high-priority industries for favorable tax treatment.

       Educated/Skilled Population -- Eastern Europe sports a large, skilled workforce. One of the only positive legacies of the communist era is a focus on universally good education -- most of the area's population can read and write, and a large percentage of people speak foreign languages such as English. That's an advantage most emerging markets simply don't have.

       With these points in mind, emerging European economies look like a solid long-term bet for investors. In fact, investors in the region are already seeing strong growth. The major stock market indices in the region have handily outpaced returns from the S&P 500 and other developed market indices over the past 1, 3, and 5-year periods.

       The Bottom Line for Income Investors
You may be wondering what this little-known "Marshall Plan 2" has to do with income investing. The answer is deceptively simple -- as this region sees eye-popping growth thanks to aid from the EU, companies are finding their coffers filled with profits. Often, these firms are simply chomping at the bit to give this cash back to investors in the form of dividends.

       Of course, uncovering high-yield stocks in emerging markets on the other side of the world is a daunting task. Luckily for you, there is High-Yield International -- the only newsletter of its kind dedicated specifically to finding high-yielding securities in foreign markets.

       On a recent search for firms benefiting from the flood of aid to Eastern Europe, I recently pinpointed a telecom with a mouth-watering yield of 14.0%. This company, which I'll discuss in full detail in an upcoming issue of High-Yield International, is headquartered in Hungary -- coincidentally, the ancestral home of my own family, on my father's side -- but it services the entire Eastern Europe region. As this area continues to grow, so should this firm's revenues, profits, and (most importantly) dividends.

       But how can I be so sure? Because this rock-solid company has shown a strong commitment to increasing its dividend payments in the past. In 1998, this Hungarian cash cow paid a paltry $0.16 per share. Fast forward to 2007, and shareholders have seen $3.83 per share in dividends -- an increase of over +2,000% in under a decade. Try finding that sort of growth in the U.S.!

       As you can see, some of the most attractive dividend-paying stocks lie outside of the United States. That's why my sole mission at High-Yield International is to show my subscribers how they can earn steady yields of 8% . . . 10% . . . even 15% or more by investing in these foreign millionaire makers.

To learn more about my High-Yield International newsletter, please visit this link.

-- Nick Lanyi
Editor, High-Yield International