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The Silver Lining to a Falling Dollar |
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By Carla Pasternak |
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The U.S. national debt sits at more than $11 trillion dollars
-- double its total from just 10 years ago. That's so much debt that
some are questioning the dollar's status as the world's reserve
currency.
But 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. Read on to see just how
much a falling dollar can boost your income stream.
(Full Story Below) |
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The
Silver Lining to a Falling Dollar
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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.
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 |
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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.
Good investing!
Carla Pasternak's Dividend Opportunities
P.S.
-- My first issue of
High-Yield International comes out tomorrow. In it,
I share some of my favorite ways to turn the falling dollar
in your favor, including a list of 10 star performers from
around the globe. You can get my issue the second that it's
released, just
follow this link.
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Notes
479
Number of foreign companies yielding between
12-25% that are also profitable over the last 12 months.
47
Number of U.S. companies yielding
between 12-25% that are also profitable over the last 12 months.
-- DO Research Staff
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