How Chile Social Security System Can Pay American Investors Big-Time

by Bryan Perry | June 20, 2011 8:55 am

Politicians mostly don’t want to touch it. And those who do see no success — consider the fear and public outcry over a proposition by Rep. Paul Ryan (R-WI) to begin addressing the issue.

Of course, I am talking here about Social Security and the need to reform the fiscally fractured entitlement program. It’s one of those problems that everyone knows needs to be fixed, but remains a political minefield few are intrepid enough to traverse.

The avoidance of this issue by those in power is tragic, because reforming the nation’s Social Security system is something that must be confronted. It’s also something that’s been done before elsewhere — and with great success. The privatization of the pension system in Chile has become the quintessential example of how a country can successfully provide citizens with retirement security.

Chile privatized its social security system in 1981 by creating what are called administradora de fondos de pensiones, or AFPs. Basically, these are companies that manage citizens’ funds and invest in markets to try and get the returns necessary to pay retirees. Every month, Chilean citizens have a fixed percent of their paycheck automatically deducted and sent to an AFP of their choice. This happens rain or shine, bull or bear market. That makes Chilean AFPs, in essence, the only asset management firms in the world with virtually guaranteed positive fund flows.

Fortunately for U.S. investors, participate in the Chilean social security model is possible via one of those AFPs. The Administradora de Fondos de Pensiones Provida S.A. (NYSE: PVD[1]), or Provida for short, is the dominant AFP in Chile. PVD provides the administration for private pension funds, including the collection of individual capitalization accounts, voluntary savings accounts, voluntary pension savings, life and disability benefits, investment services and accounts administration.


The privatization of Chile’s national retirement system has spurred the savings rate to 26%, while the country has maintained annual GDP growth of 6% amidst strong wage growth. Those dynamics have further added to long-term fund flows and AFP profits. Thirty percent of the assets in the entire system are under Provida management. And like any asset management firm, capital expenditures are nominal, enabling the company to pay out a fat dividend yield.

As of June 10, PVD boasted a dividend yield of 10.21%, and pays a semi-annual dividend of $1.87 per share. Over the past 52 weeks, the stock is up 63%. Yet, over the past month, PVD shares are down over 9%. The pullback here, along with the rest of the selling in global markets, means you can get in on the Chilean privatized social security system now at an attractive price.

So, while politicians in the U.S. keep fiddling while Social Security keeps burning, you can take your retirement fate in your own hands with a stock like PVD.

Disclosure: Bryan Perry recommends PVD in his Cash Machine advisory service.

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