Thursday, August 27, 2009

Dividend Stocks for Hedging against Dollar’s Long Term Fluctuations

In general, ability of the companies to pay dividends depends upon its profitability, cash flows, earnings, prudent money management (think debt!). With the ongoing recession many have started expressing concerns about long term prospects of US economy. Among many issues, one aspect that has been gaining momentum is the strength of dollar and its status as world currency. It is widely discussed (probably rightly so) that the continued infusion of printed dollar will dilute its value. Further the US government’s debt will cause a credibility issue in longer term. All this will reduce the value of the dollar. In one of his recent interviews, even Buffett acknowledged the concern. However, there is not much analysis on how the master investor plans on addressing this issue in BRKs portfolio.

In the context of dividend investing, I believe any effect of change in dollar value will be much more profound and will affect the real total return. Dividend investors need to look at the macro economic scenario and understand how it will play out in long haul over a period of next 10 years, 20 years, or 30 years. There are folks on both sides of the aisle who make compelling argument. On one side of the aisle the argument centers on supply and demand. The flooding of printed dollar into the market will cause inflation and hence reduce its value. On other side of the aisle, the argument is that governments of many other countries are doing same for their currency. Therefore, the net affect will be practically zero. There is also another argument that printed dollar will only offset trillions of dollar lost in markets in 2008, and hence it is not likely to affect inflation. Although, I think trillions of dollars lost in market were paper money (not physical dollar), while the dollar is being pumped into the economy is physical money.

In these arguments, what do we individual investors do? Which side do we take? Or does it even really matter to take sides? Unlike physicist and engineers, economists cannot predict or control what will happen to economy. Economist can only justify afterwards why things happened that way (rather than what will happen). Honestly, I do not think anybody knows how economies will evolve. Being a dividend investor one does not need to take any sides (pun intended!). All we need to do is go back to basics. Dividends come from earnings and cash flows. Look for dividend companies that get its earnings and cash flow from global operation. This is the best hedge against dollar value.

I continue to believe there are (and will be) quite a large number of US and other multinational corporations that will profit from global operations. List below are companies that generate their revenue (and hence earnings) from all types of economies. Most of these corporations have paid growing dividends in last five years as measured in their native currency. Figures in bracket indicate approximate percentage revenue from emerging markets.

  • Proctor and Gamble (33%)
  • Unilever (33%)
  • The Coca Cola Company (approx. 60%)
  • Pepsico Inc. (approx. 50%)
  • Cadbury PLC (20%)
  • Nestle (25%)
  • Johnson and Johnson (58%)
  • Qualcomm Inc (61%)
  • Intel Corporation (52%)
  • International Business Machines (46%)
  • Exxon Mobil Corporation (60%)

Summary is…
Investing is simple if we go back to basics. Invest in dividend growth companies that have notable presence in all markets. Dividend investors continue to have array of companies which can be used as a hedge against dollar value reduction. After that, the discussion of dollar devaluation becomes on inconsequential.

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1 comment:

  1. There's a stock that's a hedge against the U.S. dollar strengthening: Universal Corp. [ UVV ]. It sells raw tobacco, and it currently yields 4.89%. The dividend's been fairly well covered by earnings.

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