Most of my income plays center around U.S. companies, but one other economy is looking especially promising right now. So, I’m going south of the border for our next high-yield opportunity.
When the rest of the emerging markets are trying to work through a commodity-related slump, the Mexican economy will grow by 2.7% this year, with GDP expected to clip 3.7% for 2015. Mexico is the second-largest economy in Latin America — and after the Mexican peso crisis in 1994, the country returned to steady growth; from 1996 to 2012, GDP expanded at an average quarter-over-quarter rate of 0.76%.
The primary reason for my favoring Mexico at this time is that it is a net-exporter economy in which 80% of its exports flow north to the U.S. Mexico is essentially a subdivision of manufacturing for corporate America and other global manufacturing powerhouses the likes of Toyota (TM) and Honda (HMC); rising car production has led to more than 10% annual growth in its manufactured-product exports.
Mexico still has plenty of work to do in implementing its bold reform program as it opens government-controlled industry to private investment for the first time in 80 years. One particular fund stands out from the rest as the best way to play the Mexican growth story.
Mexico Fund ETF (MXF) is a closed-end fund that trades on the New York Stock Exchange and has existed since 1981 with the same management team in place since its inception. The fund holds 29 stocks, all with a phenomenally low cost basis that supports the managed distribution, which is paid out almost entirely from long-term capital gains. At present, the managed annual distribution of $2.86 per share represents a hefty current yield of 10.9%.
I spoke with MXF’s lead investor-relations contact in Mexico City a few weeks ago, and the fund’s board is very comfortable with the current quarterly distribution of $0.71 per share. Top holdings include the giant beverage operator Fomento Economico Mexicano (FMX), cement maker Cemex (CX), Carlos Slim’s telecom behemoth American Movil (AMX), Walmart de Mexico (WMMVF), Kimberly-Clark de Mexico (KCDMY), Mexichem (MXCHF) and Grupo Financiero Banorte (GBOOY).
Shares of MXF and its core holdings pulled back with the broader markets, and recently took a slight dip along with other Latin America stocks on news that Brazil’s left-wing president, Dilma Rousseff, was re-elected. In terms of stepping in when long-term assets are on sale, I believe Mexico offers the best risk versus reward for those who want to gain exposure to young and growing economies with strong export markets.
This is a fairly simple story and strategy, similar to China’s when it divested some of its government-owned businesses — and that sparked a huge multi-year rally. The country is joined at the hip with the prosperity of the U.S., like I mentioned before; as the U.S. goes, so goes the well-being of Mexico. The privatization of industries will provide multiple catalysts for its equity market for years to come. Trading just above their net asset value, shares of MXF are changing hands at $26.25, way off their 2013 high of $38.
MXF offers a compelling opportunity to profit from growth in America’s second-largest trading partner (after Canada) while earning a more than 10% dividend yield.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. And most recently, Bryan introduced Cash Machine Trader. With this service, he’s increasing the income stream potential even further by using covered call writing strategies to generate yield in the form of option premium — on top of capital appreciation income from well-known stocks.