The fundamental law of investing is uncertainty.
To put it another way, investors get paid to take risks. If the future were known, there would be no need for the markets. You could simply price a stock based on its known future earnings. Bingo! You could shut down the New York Stock Exchange and turn Wall Street into a shopping district.
But we don’t know the future. We can make our best guesses about what will happen. But that’s all they’ll ever be: guesses. The one thing you can be sure of as an investor is that the markets will surprise you. And when they do, you better have a plan.
For instance, you want to make sure your investments are diversified over different assets classes, sectors and geographical regions. The better diversified you are, the less exposed you are to one single event causing major losses to your portfolio.
Another thing you can do in the face of uncertainty is get “paid up front” for owning stocks.
There are two ways you make money from buying stocks. You can sell them on a higher price (capital gains) or you get paid an “income” from dividends.
Dividends are the portion of profits companies pay directly to shareholders.
Companies can either reinvest profits in the growth of the company or they can share these profits with shareholders as a dividend payment.
Usually companies keep some profits and pay the rest to shareholders.
Companies pay out dividends as a fixed amount per share. The more shares you own the more you get paid. It’s that simple.
Most investors don’t like dividends. Dividends are not exciting. High-growth companies rarely pay out dividends. Secure and stable companies tend to pay the best dividends.
The words “secure” and “stable” sound boring to most investors. So they run off chasing “hot stocks” instead. This is more exciting. Until it gets so exciting that you lose money.
If the words “secure” and “stable” make you want to fall asleep, dividends aren’t for you. If you’re looking for exciting ways to spend your money, I suggest you try your local casino or dog track. Maybe there’s a reverse bungee jump in your area. I hear the “ground rush” is amazing.
But if “secure” and “stable” sound like reasonable objectives to you, you might want to consider adding some dividend-paying stocks to your portfolio.
Think of it this way: If a stock pays you a dividend yield (the cash flow you get relative to the share price) of 6%, you know you are going to make 6% of your initial investment back on top of any capital gains you might get for owning the stock.
It’s like picking up an annual paycheck from the company. And knowing you’re going to pick up that paycheck ahead of time.
Of course, you need to know where to look for solid stocks with high dividend yields. One of my favorite sectors for this kind of stock is the Brazilian electric utilities sector.
Investors don’t like Brazil right now. Since the start of the year, the big Brazilian equities ETF, the iShares MSCI Brazil Index (NYSE:EWZ), is down about 4.4%. But Brazil remains one of my favorite emerging markets because of its massive commodities wealth, its strong domestic consumer market and its relatively well-managed democratic system (less unwieldy than India’s and not autocratic like China and Russia).
Despite the downturn in investor sentiment, Brazil is still expanding fast. Its economy grew 7.5% last year. And analysts expected it to grow at more than 5% a year through 2011.
As the Brazilian economy grows, so will demand for electricity. Even better, Brazilian electric utilities have fat dividend yields. Three dividend paying Brazilian electric utilities I like are:
1) CPFL Energia S.A. (NYSE:CPL) – Dividend yield of 6.3%
2) Companhia Energetica Minas Gerais (NYSE:CIG) – Dividend yield of 6.2%
3) Companhia Paranaense de Energia (NYSE:ELP) – Dividend yield of 2.7%
If you’re looking for excitement, these companies are not for you. But if you don’t like surprises…and are looking to get paid up front for owning stocks while diversifying into one of the most promising economies on Earth…you may want to consider adding these to your overseas portfolio.