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The
Silver Lining to a Falling Dollar
Despite the U.S. national debt, there is a silver lining for income
investors. This massive spending, combined with movement out of U.S.
Treasuries, is going to take its toll on the dollar, and
international income investors could reap the rewards in the form of
higher dividends. |
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The Silver Lining to a Falling
Dollar |
Published:
July 9, 2008
Living in Canada, I see first-hand the impact of the falling U.S.
dollar. From 2002-2007, the Canadian dollar soared uninterrupted over
its stateside counterpart.
Over that time, it usually cost me less and less to purchase anything in
U.S. dollars... whether it be investments or even vacations. Even though
I was spending the same amount of money, my Canadian dollar simply went
further in the United States.
If you're living in the U.S., don't fret. You can take advantage of the
same phenomenon by investing abroad. And if you're an income investor,
you'll find that your dividends can soar because of it -- even if the
underlying company doesn't raise them a cent.
How Far the Mighty Fell
From a peak in July 2001 to a low in April 2008, the U.S. Dollar Index
fell by a staggering -41%. As world economic growth exploded, investors
somewhat shunned the U.S. markets, instead focusing on developing
nations with high growth prospects.
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Meanwhile, U.S. deficits began
to soar at an astounding rate. Public debt ballooned over +50% from $6
trillion in 2000 to over $9 trillion in 2007. As you likely know, heavy
debt loads can lead to instability in a company or a country. And with
foreign markets booming while the United States racked up more and more
debt, entities around the world demanded fewer dollars -- helping lead
to its long-term decline.
However, with the onset of the financial crisis, the trend reversed. As
economic crisis spread, investors parked cash in still safe-haven U.S.
Treasuries to ride out the storm. As a result, during the height of the
financial turmoil -- July 2008 and March 2009 -- the U.S. Dollar Index
soared +24%.
But now the long-term downtrend seems to be reappearing as the
fundamental reasons for the dollar's prior decline have been
dramatically amplified in recent months. The U.S. government has been
borrowing and spending like never before. The Obama administration
estimates budget deficits will soar to $1.84 trillion in 2009 and $1.26
trillion in 2010.
And as panic from the financial crisis has waned, dollars are flowing
out of dollar-denominated assets like Treasuries and into foreign
investments once again -- even though some of those foreign countries
have debt loads and credit ratings that are worse than the United
States'. The U.S. Dollar Index has already fallen -10% since March, and
that's good news if you're investing abroad for income.
Falling Dollar = Higher Income
By investing abroad, you'll see your dividends increase in dollar terms
as the U.S. dollar falls.
For example, between July 2001 and April 2008 the dollar lost -46% of
its value relative to the euro. Let's say over that time a European
stock paid 5 euros a year in dividends. In 2001, you would have received
just US$4.20 in exchange. But after the dollar fell, that same 5 euro
payment would be converted to US$8.00 in 2008 -- an increase of over
+90%, even though the actual payment didn't increase by one cent.
Investing abroad isn't as exotic as it sounds, either. Many foreign
companies trade right on the NYSE. They simply make dividend payments in
their native currency and then translate them over to dollars for U.S.
investors. In addition, several full-service and discount brokers offer
direct access to foreign exchanges denominated in foreign currencies.
Either way you go, as the dollar declines, your income and the value of
your dividends will increase in dollar terms. And given how enormous
deficits and continued foreign investment will take their toll on the
dollar, this boost could happen sooner rather than later.
If you want to take advantage of the falling dollar, you might like CPFL
Energia (NYSE: CPL). I'm looking at the Brazilian energy giant right
now... it already yields a whopping 7.8% based on payments totaling
about US$3.70 in the past year. And over the past four months, the
dollar has fallen about -20% against the Brazilian real. If that
continues, you'll see even higher payments from CPFL in dollar terms.
[http://www.streetauthority.com/includes/editor-profiles-hy.htm]
Disclosure: None.
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