This Brazil ETF Yields a Massive 13.5% and It’s on Sale
The iShares MSCI Brazil ETF (NYSEARCA:EWZ) is down 20% over the past year, but its 13.5% dividend yield is just one factor that makes it an attractive investment opportunity right now. Here’s why EWZ looks like a Buy at these levels.
A Monster Dividend Yield
No need to bury the lede here — a monster 13.5% dividend yield is a key part of EWZ’s appeal. This yield crushes the rate of inflation (6%), the yield offered by the U.S. 10-year Treasury note (3.4%), and the average yield for the S&P 500 (1.7%).
This gives investors some serious passive income and also a significant margin of safety when investing. Theoretically, all things being equal, an investor would receive back the entire principal of their investment in the form of dividend payments alone in about seven and a half years based on the current yield.
Note that EWZ usually pays dividends two to three times a year, as opposed to the quarterly basis that many U.S. investors are accustomed to.
EWZ has paid a dividend for 19 consecutive years, and it has grown its dividend payout at an impressive 39.7% compound annual growth rate (CAGR) over the last five years.
Rock-Bottom Valuations
In addition to EWZ’s 13.5% dividend yield, the stocks that it holds trade at rock-bottom valuations.
As of the end of 2022, EWZ’s holdings had an average price-to-earnings ratio of just 5.7. Compare this to the average multiple for the S&P 500, currently above 20, and Brazilian equities clearly look like a bargain.
Granted, investing in emerging markets like Brazil typically comes with more risk than investing in U.S. equities, so let’s also compare EWZ to another iShares ETF, the $24.5 billion iShares MSCI Emerging Market ETF (NYSEARCA:EEM), which invests across emerging markets, including Brazil. Even in this comparison, Brazilian equities stand out — the average price-to-earnings multiple for EEM’s holdings of 11 is nearly double that of EWZ’s 5.7.
Be Greedy When Others are Fearful
If you’ve read to this point, you may be thinking, this all sounds great, but what’s the catch? Why is EWZ’s yield so high, and why are Brazilian equities so cheap?
EWZ put up a strong performance in 2022, with a total return of 12.4% at a time when U.S. indices were in bear market territory. However, it sold off sharply toward the end of the year, when former President Luis Inacio Lula da Silva (best known simply as “Lula”) defeated incumbent Jair Bolsonaro in a contentious election to win the Presidency again after serving time in prison for a corruption charge.
Investors widely expect that the left-leaning Lula will not be as market-friendly as his predecessor. There are fears that he could increase social spending, raise corporate taxes, impose windfall taxes on energy companies like Petroleo Brasileiro — known as Petrobras (NYSE:PBR) — one of EWZ’s top holdings, and slash or even halt dividend payments from Petrobras, a company in which the Brazilian government maintains a controlling stake.
However, as legendary investor Warren Buffett says, it often pays to be greedy when others are fearful, and while Lula certainly could be less investor-friendly than Bolsonaro, the rewards seem to outweigh the risks based on a 13.5% dividend yield and the bargain-bin price-to-earnings multiple that trades at just half of the emerging market average.
Furthermore, without delving into politics and just looking at the facts themselves, it’s possible that Lula won’t be as bad for the Brazilian market as some prognosticators fear. We can look to history as an example here — the Brazilian stock market actually fared very well the first time Lula was in office, from 2003 to 2010.
While EWZ is down about 22.5% over the past decade on a total-return basis, it still boasts an enviable 204% return since inception in 2000, with the years of Lula’s first Presidency doing a lot of the heavy lifting. There were some phenomenal individual years for EWZ during his first term, such as the ETF’s 116.6% total return in 2003 and its 121.9% return in 2009.
We don’t yet know how the market will fare during Lula’s current term, but looking at this encouraging historical data is certainly a positive counterweight to some of the most negative sentiment coming from bears.
Additionally, former President Bolsonaro’s party won the most seats in both chambers of Congress, and right-leaning allies handle half of the lower chamber, meaning that even if Lula wants to enact anti-market policies, he won’t have free reign to do so and will have to find some ways to compromise with the right-leaning voting bloc.
Again, it pays to be fearful when others are greedy and greedy when others are fearful. With Brazilian equities priced like Lula will destroy the Brazilian economy, maximum fear seems to be in the air, meaning that it could be the right time to buy EWZ.
Additional Thoughts
These three reasons make EWZ a compelling Buy in my book. In addition to these factors, there’s a lot to like about Brazil as a market in general. It’s one of the world’s top 10 oil producers, and it’s a major producer of metals like gold, copper, nickel, iron ore, and tin. It’s also a global leader in other commodities like coffee, sugarcane, livestock, and oranges, so this is a country that is blessed with rich natural resources.
Brazil is a massive market with over 200 million people (making it the world’s 7th most populous country) and a workforce of over 100 million, the world’s fifth largest. Brazil also has the world’s eighth-highest GDP on a PPP (purchasing power parity) basis. For reference, the concept of PPP involves adjusting for variations in purchasing power that arise due to differences in the cost of living and inflation rates across different countries.
Additionally, the iShares MSCI Brazil ETF holds 50 positions, and its top 10 holdings account for 59.9% of assets. While this isn’t as diversified as some of the popular broader-market ETFs often discussed here, for an ETF expressing a single-country view, this amount of diversification seems appropriate.
One thing to be aware of is that Vale (NYSE:VALE) accounts for nearly 20% of the fund, so EWZ has outsized exposure to Vale’s performance. A large position in various share classes of Petrobras also means that EWZ will have significant exposure to oil prices.
See below for an overview of EWZ’s top holdings using TipRanks’ holdings screen.
Lastly, EWZ’s expense ratio of 0.58% is relatively high, but more specialized country-specific ETFs like this often have higher fees than broader-market ETFs.
Overall, the reward seems to outweigh the risk in the Brazilian market, especially when considering EWZ’s 13.5% dividend yield, so I plan on adding this ETF to my own dividend portfolio in the near future.
