Wednesday, October 29, 2008

Currency & Canadian Investors

The rapid appreciation of the U.S. Dollar vs. the Canadian Dollar is currently changing the landscape for Canadian dividend investors. One month ago 1.00 U.S. Dollar = $1.03 Canadian. As of writing this now $1.00 U.S. Dollar = $1.27 in Canadian funds. This dramatic swing is attributed to a number of factors including the decline in energy and commodities, the abandonment of risk, and a flight to U.S. treasuries.

This phenomenon is affecting Canadian dividend growth investors in several ways:

1. U.S. stocks are suddenly not that cheap anymore.

One month ago buying 100 shares in JNJ at $60 cost Canadians $6,180 ($61.80/share), whereas today the same chunk costs $7,620 ($76.20/share). (an increase of 23%) So much for taking advantage of share price weakness in U.S. names.

2. Every U.S. company held has effectively raised their dividend by 23% in one month.

One month ago JNJ's 100 share dividend as paid into a Canadian's investment account would have been $47.38 Canadian. The same dividend payment would now be $58.42. That is a tangible benefit of currency fluctation.

3. On paper U.S. equities held are 23% more valuable.

Sure buffers the steep sell off in stocks that we've seen over the same period!
This has been the largest one month move in the Canadian Dollar since the 1950s.

This article was written by the moneygardener. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

4 comments:

  1. I'm sure glad I made that big switch from CDN$ to USD in my RSP last fall when the dollar was right around parity. You couldn't have known, but sometimes taking small advantages of what seem like inconsequential things can have a big impact on your ability to earn a return.

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  2. MG: It works the other direction also. For me (U.S.) my Canadian dividends are declining on a constant C$ dividend. The share prices are getting cheaper though.

    Best Wishes,
    D4L

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  3. With regard to the US dollar the Loonie, this to shall pass.
    ---
    NurseB911 - what do you mean you switched from CND to USD in your account? did you buy us stocks or did you use some transaction to buy USD?

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  4. Anon,

    When I make a RSP contribution I do so with Canadian dollars. Back last fall when the exchange rate was more favourable (CDN$ = $0.99-$1.05 USD) I exchanged a large portion of my cash with the long-term objective of buying US equities over the next year. I keep all my US investments in my RSP and with the dollar as high as it was it made perfect sense to take advantage of the opportunity

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