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This Company has the Highest Dividend Yield in the Stock MarketBy
Tuesday, June 15, 2010
Israel just changed from an "emerging" market to a "developed" market...
MSCI Barra manages a collection of world stock indexes. You've probably heard of the MSCI Emerging markets index or the MSCI World index. There are dozens of them, representing all the major international stock markets.
MSCI's recent upgrade of Israeli's stock market validates Israel's transformation from a rural economy to one of the world's technology powerhouses. I'm sure Israeli investors were celebrating the change. But as far as Israeli stocks are concerned, it's still an emerging market...
Liquidity is one reason. Israeli's stock market is tiny. The Tel Aviv 25 Index is Israel's equivalent of the Dow Jones Industrial Average. The TA-25 has a total market cap of $121 billion – about the size of Coca-Cola.
To give you an example of just how illiquid the Tel Aviv market is, when all the emerging market funds dumped Israeli stocks and developed market funds bought them, the flood of buy and sell orders overwhelmed traders...
Volume on the Tel Aviv Stock Exchange was four times greater than average. Trading was so frenetic, the stock exchange had to extend the trading session twice – first to 5.30 p.m., then to 6 p.m. – so brokers could finish processing orders. It took the market until 7.30 p.m. to clear all the trades.
Big international money managers hate markets without liquidity. It makes it hard for them to take meaningful positions... or to enter and exit their positions without moving prices. As a result, Israeli stocks always trade at much lower valuations than other countries.
Right now, Israeli stocks trade at a trailing P/E ratio of 5.4, compared to a P/E ratio of 14 for the MSCI Europe Index and 16 for the S&P 500.
Income investors, especially, need to know about Israel. Emerging market stocks tend to pay higher dividends than developed stock markets. Israeli stocks pay some of the best dividends of any stocks in the world. For example, I just screened the entire U.S. public markets for high-yield stocks. I found 97 stocks with dividend yields over 10%.
The two stocks with the highest yields are both from Israel... and there were six Israeli companies on my list.
An Israeli company named Mind C.T.I has the highest yield. Mind makes data-processing software for the telecom industries. It's paying a 40% annual dividend. With a yield so high, there's probably something wrong with this company. So I'm not suggesting you blindly buy high-yielding Israeli stocks.
But I am suggesting that Israeli stocks in general pay high dividend yields. And because the market is so small, you might be able to find a safe, cheap income investment that pays you much higher returns than you get from your U.S.-based income investments.
In total, there are close to a hundred Israeli stocks trading on American exchanges... so they're as easy to buy as Microsoft. And most of them pay dividends.
I'm just starting my research here, so I don't have any specific recommendations. But I'll be focusing on mature companies that operate monopolies... like telecom providers, for example. They're less risky and they won't waste shareholder money on growth initiatives. They'll pay it out as dividends instead.
Israel may be a developed country, but its stock market still trades like an emerging market with high dividend yields, low valuations, and thin liquidity. You can use this to your advantage, especially if you're an income investor.
Good investing,
Further Reading:
Plenty of big international stocks trade on the U.S. exchanges. But if you're looking to buy on a foreign exchange, be careful. A lot of discount brokers have trouble executing the trades. Read Steve's story about how one order cost him $850 – and how you can avoid the same problem – here: The Right Way To Buy International Stocks.
Market NotesEditor's note: This is "income week" in Market Notes. With interest rates at record lows, retirees and other income-focused investors are having a hard time finding investments that pay an acceptable cash return. That's why we invited DailyWealth coeditor Tom Dyson to "sub in" for the next four days of Market Notes.
You see, Tom also writes The 12% Letter, which specializes in safe, high-income opportunities you're unlikely to hear about anywhere else. For one of his best ideas right now, read on... THE ONE-CLICK WAY TO BUY GUARANTEED INCOME
If you want to generate income in a bear market, you need to own preferred stock...
When you buy preferred stock, you're making a loan to a company. The company has a legal responsibility to pay you a set interest rate and to return the full face value of your loan. Most preferred stocks pay interest between 5% and 15% and they trade with $25 face values. There are around 1,000 preferred stock issues trading on the NYSE right now. (You can browse a list at Quantum Online.)
One of them is EDT, a preferred stock issued by Entergy, the giant nuclear power company. My 12% Letter readers bought EDT back in July 2009. Below, you'll find a performance chart that shows how well we've done, including dividends. Not bad for a world of 0% interest rates. And we'll continue to receive a guaranteed 8% return for the life of the loan.
– Tom Dyson
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