Heading South For Higher Yields: Latin America's Top Three Income Stocks

Until this decade, investing in Latin America was similar to a canoe trip on the Amazon River: a potentially rewarding journey -- but watch out for piranhas. A country's stock market reflects its economy, and most Latin American economies were characterized by instability, unpredictability, and wild boom-and-bust cycles.

But since the turn of this century, we've witnessed a sea change in Latin America. Thanks to the confluence of several positive factors the region's largest economies have become paradigms of stable, strong economic growth -- and its stock markets have surged as a result.

Three factors, above all, have contributed to the change: stable, economically rational governments; increased exports thanks to globalization and trade liberalization; and rising commodity prices. And because of this, Latin America has attracted plenty of investment capital and delivered great returns for investors in this decade.

Compare this decade's total return of the S&P 500, the commonly used proxy for the largest U.S. stocks, to those of the major stock market indices in each of the four largest countries in Latin America:

It's important to note that stock prices in the region have risen not only because of economic growth, but because investors have also grown more comfortable investing in the region. Latin America always had its share of well-managed companies with attractive businesses, but their share prices had to be discounted to account for the implied political and currency risk and the associated volatility. Now, these concerns have lessened, allowing foreign investors a chance to invest in one of the most attractive regions in the world without the dramatic risk it once carried.

The good news for income investors today is that even with the run-up in Latin American markets, discounts still remain on certain stocks, and investing in the region's high-yielding stocks offers a further buffer against any risks.

In addition to strong economic growth, Latin American stocks have and will continue to benefit from another trend: the falling U.S. dollar. When the dollar falls versus another currency, it's good news for U.S. investors holding securities denominated in that foreign currency. When it comes time to sell and convert the proceeds back into U.S. dollars, the total return from the entire transaction will be boosted by the gain the foreign currency enjoyed versus the U.S. dollar -- meaning higher returns, even if the share price didn't move a cent. And the same goes with dividends denominated in a foreign currency; even if they don't go up at all, a falling dollar means they are worth more when converted back to U.S. currency.

As one example of the currency trend, witness the performance of the U.S. dollar versus the Brazilian real over the past few years:

As you can see, the dollar has fallen about -50% against the real since 2003. If you invested your money in 100 shares of a Brazilian stock trading at 50 reals in 2003, it was worth about $1,400 in U.S. dollars. Now say that same stock still trades at 50 reals -- thanks to the falling dollar, it would now be worth more than $2,800 when converted back to U.S. dollars -- a gain of over +100% without any appreciation in share price. The story is the same with any dividends paid by the company. Obviously then, the weakening dollar can boost a U.S. investor's income stream assuming they are investing internationally.

While we don't think the U.S. dollar will continue to fall as sharply against the real or other Latin American currencies, we predict the downward trend will still continue, for two main reasons.

First, the U.S. continues to run huge trade deficits -- we are importing more than we are exporting, sending a lot more dollars out of the country than are coming back in. While other countries send dollars back to us by investing heavily in U.S. financial assets, such as Treasury bonds, that isn't enough to prop up the dollar's value. And it's likely that some of the largest purchasers of Treasury securities, notably China, will spread their bets around more in the future -- for example, by investing in Europe. This will only further weaken demand for the dollar.

Second, looking at a shorter-term trend, the slowing U.S. economy has caused the Federal Reserve to lower short-term interest rates, which eventually brings longer-term bond yields down. At the same time, U.S. corporate earnings are expected to slow in the coming quarters. This makes foreign bond yields and corporate earnings look more attractive. What does this mean for the dollar? Investors around the world are likely to shun the lower return U.S. market in favor of more attractive regions -- leading to lower demand for U.S. currency and a lower-valued dollar.

Which country listed below offers AVERAGE dividend yields of 8.5%?

(Hint . . . the answer might surprise you)

(A.) United States
(B.) United Kingdom
(C.) Brazil
(D.) New Zealand

Click here to learn the answer...it's free!

Now that you have read a broad overview of the case for investing in Latin American stocks, let's take a closer look at one country as a case study: Brazil.

Brazil
The region's largest country and economy is blessed with a diversified industrial base and a wealth of natural resources. Until the last five years, its economic history was rife with instability, high inflation and interest rates, and poor government policies.

However, Brazil has recently gotten its act together. Interest rates have come way down over the past five years, in part because the national government no longer runs huge budget deficits. This is thanks to disciplined spending policies, tax reforms, and rising commodity prices, which have been a boon both to economic growth and the government's tax revenues.

These factors have helped Brazil's economy grow significantly in recent years. Its gross domestic product (GDP) now exceeds $1 trillion, ranking Brazil as the world's ninth-largest economy, according to the World Bank. Best of all, this growth has come while inflation has declined substantially. After peaking at about 12.5% in 2002, inflation has steadily declined since then, dropping to a very manageable 3.1% in 2006 before rising to the still-reasonable 4% range currently.

Brazil has thrived thanks in large part to strong industrial, agricultural and mining sectors -- all of which contribute to a diversified export economy. About a quarter of its exports go Europe, a quarter to the U.S., about 20% to Latin America and another 12% to Asia. Exports have risen by about +15% per year over the past five years.

Brazil's industrial sector includes fairly low-cost production of cars, steel, airplanes and chemicals. Blessed with some of the world's most fertile soil, Brazil is a major producer of foodstuffs that are seeing rising demand, including soybeans. Its ample natural resources include significant deposits of iron and manganese, major offshore oil reserves, and of course the Amazon rainforest -- whose exploitation is criticized by environmentalists, but is a boon to the Brazilian economy.

Ironically, in other areas Brazil has been at the forefront of environmentally friendly economic planning. The country has a growing reputation for top-notch scientific and technological innovation, particularly in the areas of agribusiness and energy: Brazil has developed new, "greener" strains of cattle and is a world leader in ethanol research and production. It also harnesses its many rivers to produce more than 90% of its electricity with clean hydroelectric power.

Brazil also has fast-growing services industries, in particular its banking and telecom sectors.

Most economists think Brazil's economy can grow at a stable +4-5% rate in the coming years, almost double the expected rate of growth for the U.S. economy. Note that Brazil does face a huge problem that could put a strain on its economy in the coming years: the majority of the population is extremely poor, and as the country's overall wealth grows, political pressure to alleviate poverty is likely to increase as well. But if the stable economic growth continues, the country's stock market should continue to perform well, even as the government spends more on anti-poverty measures.

Brazil is just the largest example of trend happening throughout Latin America. And the economic boom is also carrying over into the Spanish-speaking Caribbean, including Puerto Rico. The region's second-largest economy -- Mexico -- has seen a dramatic rise in its middle class. Put it all together, and the long-term trend is clear: Latin America is a great opportunity for foreign investors.

Of course, the economic growth of Latin America and the rest of the world makes for great headlines. But what we as income investors are interested in are dividends.

We've found especially happy hunting grounds among Latin American utility companies such as electric providers and telecoms. As is the case in the U.S., in much of Latin America utilities enjoy monopoly or partial-monopoly status in exchange for submitting to regulatory controls, including relinquishing the power to set prices. They tend to be slow-growing companies with strong, dependable cash flows. Because they're highly regulated, they often lack the freedom to invest excess cash into lucrative new money-making operations. Instead, they distribute their healthy cash flows to investors in the form of dividends.

Another interesting area of opportunity we've found: financial services. Although Latin American banks and other lending institutions are heavily influenced by their counterparts in the U.S. -- Latin American banks' main partner for loans, deposits and joint ventures -- the credit woes that hit U.S. financial-services companies in mid-2007 aren't impacting Latin American banks as seriously. However, some have been caught up in the cross-continental sell-off of banking stocks. Once the crisis eases, banking companies should enjoy strong growth prospects as major participants in the region's financial boom period. And thanks to their lowered share prices, yields have risen accordingly.

Below, we have profiled several of our favorite Latin American stocks that should provide income investors with juicy yields in the coming months and years.

The remainder of this report is available exclusively to paid subscribers. In it, we provide in-depth analysis of three securities with strong income potential, thanks to economic growth in Latin America. These include:

A telecom provider that is benefiting from the emergence of Brazil. As the dominant telecom in the country's largest city, this firm is able to shower investors with an 8.0% yield.

A Latin American pension provider -- this firm is as stable as they come, and sports a 5.5% yield. Thanks to the falling dollar, however, your dividends are boosted even more.

A Latin American bank making inroads into the U.S. As a name that Hispanic citizens recognize, this firm's U.S. operations are growing quickly. Best of all, the stock yields 6.0%.