We have recently noted that high yield stocks may hide a fundamental weakness and "all that glitters may not be gold." With that in mind, Ilan Moscovitz of The Motley Fool introduces five European stocks with high yields and one wonders whether they are gold or something else.
He quotes S&P Capital IQ, stating that 20 eurozone companies trading on major U.S. exchanges are now yielding over 5%. Ilan filters this further with reasonably stable businesses, that can afford to meet their short-term interest obligations (in case credit gets more expensive), and that earn their revenue from a diversified geographic base.
Those with the strength to survive may actually benefit from a weaker euro. He selects five from this list.
Euro Exports as % of Revenue*
|Telefonica (NYSE: TEF)||Spain||43%||4.8||10.9%|
|France Telecom (NYSE: FTE)||France||30%**||3.7||11%|
|Nokia (NYSE: NOK)||Finland||66%||9.0||8.1%|
|Total (NYSE: TOT)||France||31%||35.1||6.1%|
|Veolia (NYSE: VE)||France||27%||2.0||12.9%|
Source: S&P Capital IQ. *As of fiscal 2010. **Approximation.
- Telefonica provides fixed telecommunications, mobile, and Internet services to Spain, Europe, and Latin America. Having access to Latin America is key as this is a rapidly growing market and provides diversification.
- France Telecom doesn't have Latin America but Africa and the Middle East are significant growth areas.
- Nokia is one of the troubled cell phone operators that has not made the jump into the smart phone leadership. This is a cheap stock with upside but still a major world player.
- Total is a massive integrated oil and gas company -- about the size of ConocoPhillips
- Veolia provides water, environmental, and energy-grid services worldwide
So, we have five strong companies with good yields but all are in the troubled eurozone. What would a portfolio look like if we owned them and how would it compare with our reference benchmark?
We will compare it with our dividend ETF benchmark and draw some conclusions based on what this gives us.
|Asset||Fund in this portfolio|
|REAL ESTATE||ICF (iShares Cohen & Steers Realty Majors)|
|FIXED INCOME||TIP (iShares Barclays TIPS Bond)|
|Emerging Market||VWO (Vanguard Emerging Markets Stock ETF)|
|US EQUITY||DVY (iShares Dow Jones Select Dividend Index)|
|US EQUITY||VIG (Vanguard Dividend Appreciation ETF)|
|INTERNATIONAL EQUITY||IDV (iShares Dow Jones Intl Select Div Idx)|
|High Yield Bond||HYG (iShares iBoxx $ High Yield Corporate Bd)|
|INTERNATIONAL BONDS||EMB (iShares JPMorgan USD Emerg Markets Bond)|
- 5 High-Yield Stocks You May Be Ignoring -- Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)
Portfolio Performance Comparison
|Portfolio/Fund Name||1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Tactical Asset Allocation Moderate||1%||20%||10%||79%||8%||60%|
|Retirement Income ETFs Strategic Asset Allocation Moderate||-2%||-5%||16%||81%||2%||7%|
|5 High-Yield Stocks You May Be Ignoring||-26%||-75%||-3%||-8%||-8%||-26%|
At first glance, I would say that these stocks are worth ignoring. On the surface, these companies may be long term players but the stock performance has not been good and I think there is a danger that the strong dividends mask a different problem. There is nothing from this chart that would make me want to pick these stocks.
Three Month Chart
click on all charts to enlarge
One Year Chart
Five Year Chart
The more detailed analysis and graphs give you a visual view of the volatility. These stocks appear to be on a longer term decline as I review the five year chart. There may be a bright future ahead for them, but it isn't clear to me what that would be. I might invest if there were some reason for a turn-up soon but purely based on dividends, I would definitely give these stocks a miss.
We will continue to track this group of stocks and see where they go.
Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.