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Forget China: Get a 9% Yield from the Next Global Economic Powerhouse

Amy Calistri

"I wish I had invested in China before it slowed down," an investor says in frustration.

I hear this all the time.

And it's not just China. You could plug in any security that's grown exponentially in a short period of time and I've heard someone complain about missing it. Too many investors get caught looking at growth in the rear-view mirror.

But rather than chasing after played-out growth stories, I think I've pinpointed a country that's just starting its growth spurt.

And it's sitting right under your nose.

Like China, this country is quickly becoming a manufacturing powerhouse. But it's not too late to beat the crowd (and the money) by investing in it today.

You'll likely think I'm talking about Brazil or India -- but I'm not.

In fact, when I tell you what country it is, you may think this is one of the last countries where you'd want to put your money.

And that's where you'd be wrong.

Renowned economists have taken notice, and financial firms like JP Morgan are already looking for ways to invest here. But you can invest here before the herd starts to drive up prices and lock in a 9% yield in the process.

So which country am I talking about?

Just the other day, Pulitzer Prize-winning New York Times columnist Thomas Friedman said this country will be one of the "dominant economic power[s] in the 21st century."

If you guessed the country is Mexico, then you're right...

  • In 2009, Mexico overtook South Korea and China as the world's leading producer of flatscreen TVs. It's also the No. 1 producer of two-door refrigerators.
  • In 2010, Mexico exported $4.3 billion in aircraft and parts for the aerospace sector, and it's expected to boost those exports 179% to $12 billion by 2020.
  • In 2012, the country manufactured 2.88 million cars (12.8% more than the year before), and Researcher LMC Automotive projects it will bump up production by another 31.9% within just four years.

And despite having a population that makes up just one-fifth of all Latin America, The Financial Times reported the country exports more manufactured products than the rest of Latin America combined.

There are two things almost everyone knows about Mexico: 1) Mexico has a problem with drug-related violence, and 2) Over the years, a large number of Mexicans have immigrated -- legally and illegally -- to the United States.

But if that's all you focus on, then you will miss out on one of the world's most dynamic manufacturing transformations, not to mention a great investment opportunity.

For starters, the country has become a hotbed for international trade. Mexico has signed 44 free trade agreements -- twice as many as China, four times more than Brazil and more than any other country in the world.

Mexico has also ramped up the number of engineers and other skilled workers graduating from its schools -- creating a smarter and more nimble labor force.

This burgeoning labor force is even giving China a run for its money...

Not long ago, China was the global manufacturer of choice, thanks to the country's low wages and vast workforce. In fact, in the early 2000s many manufacturers fled Mexico to take advantage of low wages and set up operations in China.

But inflation has pushed Chinese wages higher. Now, the average worker in Mexico gets paid about the same as a Chinese worker.

And that has manufacturers moving back to Mexico at a record pace.

Honda (HMC), for example, is building another plant in Mexico that will essentially double its production of cars there by 2016. Volkswagen's Audi unit will open the first luxury-brand auto plant in Mexico in 2016. Nissan is spending roughly $2 billion to build its third plant in Mexico, scheduled to start production by the end of this year.

Mexico has been grabbing a larger share of imports into the United States. In 2005, 11% of manufactured imports came from Mexico. By the first half of 2012, that share jumped to 14.2%. The U.S. Department of Commerce projects that Mexico's share will increase to 16% by 2018.

With all the good news about Mexico's bustling manufacturing sector, I'm not surprised that Mexico's gross domestic product grew a healthy 3.9% last year -- more than twice as fast as the United States.

Here's how I'm profiting from Mexico's transformation right now...

One of the best plays on the Mexican economy is the The Mexico Fund (MXF), a well-rounded fund that pays a solid dividend.

This is a diverse fund that has plenty of exposure to financials, health care, media, transportation and mining companies within the booming Mexican economy -- all of which should benefit from a growing middle class driven by the manufacturing boom.

The Mexico Fund holds a number of Mexican subsidiaries of U.S. consumer companies. For instance, you'll find shares of Kimberly-Clark de Mexico, Coca-Cola FEMSA (KOF) and Wal-Mart de Mexico.

Shares of America Movil (AMX), the fourth-largest mobile telecommunications provider in the world, make up more than 10% of the fund. The fund's second-largest holding (7.7%) is Fomento Economico Mexicano (FEMSA) (FMX), the parent company of Coca-Cola FEMSA and operator of OXXO, the fastest-growing convenience store chain in Mexico.

The Mexico Fund's generous dividend has made it an attractive security for income investors. But its good dividend is about to get even better.

The fund currently pays a quarterly dividend of almost 63 cents per share. At current prices, its dividend yield is a hefty 7.3%.

But thanks to the growth in the fund's net asset value at the end of 2012, the dividend is about to increase to roughly 77 cents per share every quarter, giving it a forward yield of 9% based on today's prices.

And that should definitely grab the attention of yield-hungry income investors...

Mexico's risks are known. In fact, its risks are all that most investors see. Many people may have been surprised by Friedman's New York Times column, but my readers weren't.

Action to Take --> I first touted The Mexico Fund in my Daily Paycheck newsletter in June 2010 and again in December 2012. The fund has already produced an 87% total return in my real-money portfolio and is on my "Buy First" list. I think the great Mexican manufacturing transformation is still in its infancy and The Mexico Fund has plenty of room to run.

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