What Do Japan, Energy and Dividends Have in Common?

A slew of reader mail recently has raised some excellent questions about investing in dividend-paying stocks, an intriguing new Japan fund, valuations in the auto sector and the latest thinking on the energy sector. Here, some feedback and advice:

Dividends for the Long Run

Hello Steve,

I am looking for a good dividend-paying stock fund. Any advice?

Thanks,

Larry Bethel

Wichita, Kan.

Hi Larry,

In my humble opinion, one of the best options to invest in dividends right now is a fairly new exchange-traded fund: the iShares Dow Jones Select Dividend Index Fund ( DVY), which trades on the New York Stock Exchange under the symbol DVY.

The ETF is a basket of 50 stocks picked for their long history of strong dividends and dividend growth. Among the biggest names are Altria ( MO), General Motors ( GM), FPL ( FPL) and Honeywell ( HON).

The fund sports a dividend yield of about 2.1%. And the portfolio looks cheap relative to the broader market -- the P/E is about 13-14, compared with the S&P 500's 20. Plus, it's cheap in other ways -- the expense ratio is a mere 0.40%.

If none of that grabs you, it's worth mentioning that Wharton professor and Stocks for the Long Run author Jeremy Siegel recently named it as a solid pick for 2004 in Fortune's 2004 outlook edition.

Cheers,

Steve

Will Sparx Fly in Japan?

Stephen,

I was wondering if you looked at Sparx Japan before you wrote the Fund Picks for 2004 column? I have been considering it since the 12/1 article in Barron's and finally found it available at their Web site last night. Looks like it became available sometime after 12/1 as it was not on the site when I first looked after reading Barron's.

Thanks,

Dale Simmons

Lakeland, Fla.

Hello Dale,

I am intrigued by the Sparx Japan fund -- in part because Barron's, one of my favorite reads, considered it legit enough to write it up.

New funds that focus on one hot area aren't always a sound investment -- remember all the tech funds rolled out in late 1999 and 2000? More often than not, new fund launches are about chasing hot performance on the part of both fund families and investors, which isn't a recipe for success. However, the Sparx Japan fund looks like a different kettle of fish. The manager, Shuhei Abe, is well-regarded and long on experience in Japan.

The firm's Web site -- www.sparxfunds.com -- is a little short on details right now, as is to be expected for a relatively new fund. But the prospectus said the fund's expense ratio is 1.5%, which is more than reasonable; the average Japan-focused fund carries a 2.28% expense ratio, according to Morningstar.

Since ( MJFOX) Matthews Japan and ( FJSCX) Fidelity Japan Small Company are proven commodities, I'm still inclined to recommend them first. However, consider Sparx Japan officially on the radar screen as a fund to watch.

The fund doesn't have a ticker symbol yet (a telephone service rep kindly informed me that a fund needs 100 investors before it can get a ticker; who knew?). However, investors can find out more information about Sparx Japan, or buy shares in the fund, by calling 1-800-632-1320.

Cheers,

Steve

Auto Values

Another TheStreet.com reader asked a question about the following passage from the same column on Japan. He cited the passage I wrote:

Back in June, I wrote a column suggesting that it was finally time to consider investing in Japan after more than a decade of devastating declines. And the Nikkei 225 returned 24.5% for the year. While 2004 may not be quite as robust, plenty of big-cap Japanese multinationals such as Sony ( SNE) and Honda ( HMC) still look cheap relative to U.S. peers.

This reader asked: "How can Honda be cheap; it has a bigger market cap than GM?"

My reply: On a forward-earnings basis, GM and Honda both have a price-to-earnings multiple of about 10. Ford's forward P/E is about 15 and DaimlerChrysler's forward P/E is about 21. That's the simplest measure to employ for relative valuations.

Even after a solid run-up since December, GM looks to be the most undervalued of the U.S. Big Three -- and that dividend is starting to look nice and plump. While the stock market's gains and hefty borrowing helped GM erase the $18 billion shortfall in its pension, GM is far from out of the woods when it comes to pension and retiree health care costs. Honda isn't saddled with such looming issues, which in my opinion makes the Japanese automakers' forward P/E of 10 look a lot cheaper than GM's.

Crude Debate

Howdy Steve,

I've enjoyed your recent columns on energy in 2004. However, I've also noticed less sanguine energy outlooks, in articles like the one entitled "Oil Stocks Look Like a Dry Hole" (Business Week Online, Jan 16.). What is the author of that article missing -- that average oil prices may stick around $30 a barrel in 2004?

Also, don't most of the major integrated oil producers throw off good dividends, which are then passed along to shareholders in the fund? Thanks again for your thoughts.

Sincerely,

Steve Aldrich

Minneapolis

Hi Steve,

Many thanks for reading and responding with the kind words. Two points worth mentioning about the worthy Business Week Online article. First, it's true that the Shell news about overstating its reserves, which came on Jan. 9, will weigh on the sector a bit. Some of the majors may be forced to standardize their reporting of reserves, which may mean these companies lower their estimates of proven reserves.

While it may put some pressure on the big companies to see their proven reserves shrink a little bit, reserve reporting has always been something of a shell game -- to steal a pun from The Economist. The lowered reserves drive home the second point -- supplies remain tight and dwindling in the oil and natural gas market. The article notes that production is increasing in Nigeria, the former Soviet Union and elsewhere, which is true. But the key is supply growth, which is really slowing down.

Non-OPEC supply growth is vital to keeping costs lower and loosening OPEC's firm grip on prices. Roughly 80% of non-OPEC oil supply growth has come from the former Soviet Union -- and that growth is slowing considerably, according to Jennison Natural Resources fund co-manager Leigh Goehring. The diminished threat of non-OPEC supply enables OPEC to keep prices high -- OPEC claims comfort with the $28 to $30 a barrel range, and they don't seem to mind it staying above $30, either.

I'm not an expert on energy by any means, so take my musings with a hefty dose of salt. And Business Week may be spot on about service-sector companies being the better investment -- Smith International ( SII) and so on. Meanwhile, you are right about the dividend.

I should add that the Business Week article didn't "miss" anything -- it was a sound piece on how the Shell news, which arose after I penned my energy column, may drag on the sector. I'm sticking to my guns that the energy sector still looks poised to outperform in 2004. To borrow from and slightly amend Mark Twain: It were not best that we should all think alike; it is difference of opinion that makes horse races -- and the stock market.

As originally published, this story contained an error. Please see Corrections and Clarifications.

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