Buy These Funds Ahead of the Fed’s Dollar Weakening
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| By Karen Riccio |
It appears that Federal Reserve Chairman Jerome Powell said all the right things when he spoke on Wednesday.
He convinced investors that three interest rate cuts are still on the table this year.
When rates eventually reverse direction after 18 months of hikes, folks who fell in love with higher-yielding bonds and fixed-income funds may not be thrilled.
However, the impact of lower rates on the U.S. dollar is also a big deal. It will weaken the dollar. But that can actually positively impact a much broader swath of investors and corporations.
Don’t get me wrong, I absolutely hate watching my home currency lose value. My overseas trips get more expensive. All the imported goods I buy cost me more.
However, there's a silver lining that you don't hear too much about — a weak U.S. dollar actually helpssome American companies that derive a large portion of revenues from their overseas operations.
A Weaker Dollar Actually Helps Dividend Payers
Take Johnson & Johnson (JNJ), for example.
It sells a vast lineup of products including Listerine, Band-Aids and baby products to overseas consumers.
In fact, I dug into the most recent annual report and discovered that a whopping 45% of J&J's total revenues came from international consumers!
Naturally, when J&J sells those products in foreign markets, it prices them in euros, Japanese yen, Australian dollars or Brazilian reals. But when it comes time to tally those sales and bring the money home, they get translated back into U.S. dollars.
Result: A weaker dollar means companies like Johnson & Johnson collect more dollars on every foreign sale.
Moreover, this same phenomenon allows American companies to charge less for their products in foreign markets and still get the same dollar amount in sales.
That's a huge advantage in today's fiercely competitive markets!
The kicker: Johnson & Johnsonhas been able to pay out higher and higher dividends for 52 straight years!
And guess what! Most of the U.S. companies about to take advantage of a weak dollar also happen to be the strongest dividend-paying companies in America.
Why do the two go virtually hand in hand? Because it takes a well-established business to be able to make inroads into overseas markets. And, at the same time, it also takes an established business to write dividend checks to shareholders consistently.
You ask … what if the economy suffers, won’t that hurt all U.S. companies?
No. Let's stick with Johnson & Johnson for a moment ...
Since 45% of its sales are coming from international markets, it's not just benefiting from a weaker dollar … it's also partially insulated from economic weakness in its home market … or any single market for that matter!
Portfolio Protection Built In
The U.S. economy increased a pathetic 2.6% in 2022 and another 3.1% last year, better than expected after the collapse of Silicon Valley Bank. This year, analysts predict around 2.2% growth.
It’s going to take time to dig us out from the ramifications of inflation and rising interest rates. Plus, the dollar could hit new lows against other major currencies in the world.
Even in a worst-case scenario of a recession, nearly all U.S. consumers still take their medicine, buy essentials and imbibe in their vices.
Some examples:
- Eli Lilly (LLY) has been selling its prescription medications around the world through booms and busts. So, it comes as no surprise that the company has been paying dividends for more than a century!
- Procter & Gamble (PG) is one of the largest multinational consumer goods corporations in the U.S. And the fact that it produces everything from food to shampoo has allowed the company to reward shareholders with growing dividend payments for 67 years.
- Smokers? They reach for cigarettes day in and day out. Thus, Altria (MO) enjoys steady demand for its major product. It diversifies into other businesses and other countries too. No wonder the company has raised dividends for the past 15 consecutive years. It’s providing a whopping 8.75% yield today.
The good news is that these kinds of companies can also help your portfolio weather the very same storms.
In fact, even if the dollar sinks and the rest of the market goes with it, dividend-paying stocks would hold up far better than shares that don't have yields.
What’s Not to Love?
It’s hard not to fall in love with companies that reward shareholders with regular payments via dividends. And ones not solely tied to the strength of the dollar even more so.
Still not convinced? Here are a few more reasons to love dividends.
- Dividends give you a great cushion for down markets. That's a great comfort in today's volatile times.
- Dividends can represent concrete, hard-nosed proof that the company's making good money. No fancy promises. No fluff! Just a nice dividend check in the mail (or automatically added to your brokerage account).
- Dividends can go up year after year after year. And with every increase, the yield on your original investment rises as well. Even if you start with, say, a dividend yield of 3% or 4%, you could wind up with a yield of 9%, 10% or 12% on the cost of your shares.
- Dividends can even give you double-digit yields right away. They're harder to find, to be sure. But if you dedicate the time to hunting them down, you can dig them up.
- Dividends know no borders. I like international dividend-paying stocks. But as I mentioned, even U.S.-based companies can earn a huge amount from overseas sales.
How to Get Started
You can buy those previously mentioned multinational stocks if you choose. OR, you might want a more diversified selection. If that’s what you prefer, consider the ProShares S&P 500 Dividend Aristocrats ETF (NOBL).
NOBL holds only the S&P 500 companies that have not just paid dividends but actually been growing those payments for the past 25 consecutive years. As you can imagine, a great majority of these noble dividend stocks are also multinational ones.
For more direct international dividend action, consider the ProShares MSCI Europe Dividend Growers ETF (EUDV) or the ProShares MSCI Emerging Markets Dividend Growers ETF (EMDV).
These two do exactly what their names imply. They hold overseas companies — in Europe and emerging markets, respectively — that have a history of dividend growth.
So, when you start to hear about falling rates bringing down the strength of the U.S. dollar, remember that there are still winners you can own — to both protect yourself AND grow your income.
Until next time,
Karen Riccio
