In this era of super-low bond yields, income investors sometimes have to get creative to keep the cash flow coming. To help, I’m on a constant mission to present alternatives to bond income. In our latest Dividend Edition, I reviewed some of the alternative income-generating asset classes I discussed last year, including REITs, MLPs and preferred stocks.
And then of course there are dividend-paying stocks, which many income investors have made the core of their portfolio for their simplicity and nice, often-rising yields. I’m going to demonstrate that benefit by looking at a major market trend and finding a way to play it for income. And today, I’m going to look at Japanese dividend stocks.
The other benefit of dividend-paying stocks: there are lots of them. Chances are, you can find a dividend-paying stock to play almost any market segment or investing theme. That means investors don’t have to miss out on hot areas or major trends just because they require income from their holdings.
In September of last year, Shinzo Abe was elected the new president of Japan. Abe’s platform rests heavily on stimulating the Japanese economy. Shortly after his election, he told the press, “With the strength of my entire cabinet, I will implement bold monetary policy, flexible fiscal policy and a growth strategy that encourages private investment, and with these three policy pillars, achieve results.”
Observers have noted that this is likely to include weakening the Japanese yen against the dollar and euro to stimulate exports. The expected change in valuation created significant waves in the stock market, sending the Nikkei 225 (a broadly-quoted index for the Tokyo Stock Exchange) soaring over 20% during the past couple months.
There are a couple ways for international investors to play this trend. One is to short the yen, as suggested by an Investment Digest contributor in this week’s Top Picks issue. But that won’t pay dividends.
For income investors, the best way to play the weaker yen and strength in the Japanese stock market is to buy dividend-paying Japanese exporters that will benefit directly. Plus, there are plenty of these companies listed on U.S. exchanges, so the transaction is simple and you’ll receive your dividends in U.S. dollars.
I have two great Japanese Dividend Stocks for you today.
The first idea comes from Jason Kelly, a newsletter editor based in Japan. In the latest Dividend Digest, he wrote:
“Canon, Inc. (CAJ) is one of the best consumer electronics companies on the planet. Its most famous segments are printers, at 35% of sales, cameras at 23% and copiers at 18%. The company’s headquarters and 26 of its 45 manufacturing plants are in Japan, but almost 80% of revenue originates in global markets. This makes it one of the Japanese multinationals that will become more profitable based on yen weakening alone. On top of this, however, it’s a well-run business.
“The company’s digital single-lens reflex (DSLR) cameras are growing in popularity as word spreads about their quality. I’m a personal lover of Canon cameras, having discovered years ago that they surpassed Nikon for the top spot in digital quality. [Yet] Canon stock is down 32% from $52 in early 2011, and 27% from $48 in April of this year.
“Most of that stock-price toll has been the fault of the strong yen, not of Canon’s business. The business is improving, which is why revenue results have stayed mostly flat as the yen inflated. In billions of yen, the company’s revenue went from 3.2 in 2009 to 3.7 in 2010, 3.6 in 2011, and 3.5 this year. It’s a gentle slope lower that would have been a cliff—to use the parlance of our times—had the business stagnated while the yen rose.
“Its 6% profit margin and 10% operating margin attest to good management in the electronics business. The stock is not dirt cheap, however, and a rocky transition in Japan’s government could put the yen-weakening a little farther out than most believe. Canon’s forward P/E is 13, its price/book is 1.3, and its dividend yield is 4%. With more yen volatility, I think this will offer better value before a sustained rise takes hold. ... I’ve listed it in the dividend section of our extended Watch List with an initial buy-price target of $27. A cost basis of less than $27 would bring good potential to double.”—Jason Kelly, The Kelly Letter, 12/2/12
With the surge in Japan’s stock market, the stock is now well above Kelly’s $27 target buy price, but it has corrected slightly (from over $40 to around $38) over the last few days. While patient investors would certainly get a bargain if the stock corrects to $27, more aggressive investors could try to buy on a dip to the stock’s 50-day moving average, currently just over $35. Even at current levels, the yield is 4%.
—-
My second idea is a global Japanese brand that has faced some challenges in recent years. But as Patrick McKeough wrote in Wall Street Forecaster last month, the company is recovering. Plus, these shares yield 2.2% while you wait. Here’s the recommendation, from the latest Dividend Digest.
“Honda Motor Co. Ltd. (HMC) is Japan’s second-largest carmaker and the world’s biggest motorcycle manufacturer. Like Toyota, Honda’s sales are continuing to recover from the 2011 earthquake and tsunami.
“In its fiscal 2013 second quarter, which ended September 30, 2012, Honda sold 996,000 cars and trucks. That’s up 46.9% from 678,000 a year earlier. Motorcycle sales increased 1.8%, to 3.9 million from 3.8 million. As a result, the company’s overall sales rose 19.0%, to $29.3 billion from $24.6 billion a year earlier. Earnings jumped 35.4%, to $1.1 billion, or $0.59 per ADR (each American Depositary Receipt represents one Honda common share). A year earlier, Honda earned $788 million, or $0.44 per ADR.
“The company sells most of its cars in North America (41% of sales) and Asia excluding Japan (30%). These regions are growing more quickly than Japan (17%), Europe (4%) and other countries (8%). Honda’s sales in China have declined due to a boycott [in response to the East China Sea territorial dispute]. As well, slowing sales in the U.S. have prompted it to spend more on advertising and offer more incentives, both of which hurt its profits. The company now expects to sell 4.12 million vehicles in its 2013 fiscal year, which ends March 31, 2013. That’s down 4.2% from its earlier prediction of 4.3 million. The lower sales will also cut its projected fiscal 2013 earnings by 20%, to $3.21 per ADR.
“The stock trades at 10.3 times that estimate. However, new models, such as the company’s recently updated Accord sedan, should spur its sales in fiscal 2014. Honda is a buy.”—Patrick McKeough, Wall Street Stock Forecaster, December 2012
You only have a few more days to subscribe to the Dick Davis Dividend Digest before our Top Picks for 2013 issue comes out next week. The issue is already chock-full of fantastic investments that will generate more income from your portfolio this year, and I don’t want you to miss out on all these great ideas. Click here now to see the special low price we’re offering for the Top Picks for 2013 issue.
Wishing you success in your investing and beyond,
Chloe Lutts
Editor of Investment of the Week
P.S. We just released our Dick Davis Investment Digest Top Picks Issue for 2013. But it’s not too late for you to profit from the recommendations. Check out some of the huge gains our subscribers earned from last years Top Picks Issue:
- Office Max (OMX): UP 113%!
- Lennar Corp. (LEN): UP 78%!
- Holly Frontier Corp. (HFC): UP 67%!
- Royal Bank of Scotland Preferred (RBS-Q): UP 47%!
- Tata Motors (TTM): UP 34%!
Turnaround situations, small-caps, revolutionary growth stocks—that’s just some of the great ideas you’ll find in Dick Davis Investment Digest.
