US Stocks that BENEFIT from a Falling Dollar
Companies / Dividends Jun 11, 2007 - 09:54 AM GMT
Nilus Mattive writes: Good morning! Martin's off today. So he's asked me to jump in.
I'm Nilus Mattive, the Associate Editor of Money and Markets , and it's my job to edit nearly every issue you get every morning, rain or shine.
Plus, I'm also responsible for a new research division in our company covering a sector that too many analysts have neglected for too long: Dividends.
Dividends were my specialty at Standard & Poor's. And now, dividends are my specialty here as well.
I love dividends for multiple reasons:
- Dividends give you a great cushion for down markets; and as you've seen just in the last few days, that's not exactly an unusual situation.
- 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.
- 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 — like I do — you can dig them up.
And perhaps most intriguing of all …
- Dividends know no borders. I like domestic dividend-paying stocks. And I like international dividend-paying stocks. Provided the yield is good and the company is secure, I don't discriminate either way.
Indeed, even when the dollar is falling, I still recommend SOME U.S. dividend-paying stocks. Here's why …
First, no matter how promising international stocks may be, it's not prudent to put ALL your money overseas. In fact, I think practically every investor should have at least some money invested in the U.S. at nearly all times.
Never forget: The U.S. is still the world's largest economy. America's public companies are still worth almost as much as all the shares traded on Europe's 24 major markets. And American companies still set the trends and standards that many foreign firms scurry to copy.
What about the falling dollar? Actually ….
The Dollar Decline Is Great News For SELECT American Companies!
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 helps SOME American companies that derive a large portion of revenues from their overseas operations.
Take Johnson & Johnson, for example. It sells a vast line-up of products, including Listerine, Band-Aids and baby products to overseas consumers. In fact, I dug into the company's 2006 annual report and discovered that a whopping 44% 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 Brazlian 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 & Johnson has been able to pay out higher and higher dividends for 44 straight years!
And guess what! Most of the U.S. companies getting the most out of the 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.
You ask …
"But What about the Weak U.S. Economy? Won't That Hurt ALL U.S. Companies?"
No. Let's stick with Johnson & Johnson for a moment. Since 44% 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!
Look, the U.S. economy might have only increased a paltry 0.6% in the first quarter of this year. But as we've been telling you, there are many other robust regions of the world that are enjoying tremendous expansion. And large dividend-paying companies are embracing those growing markets with open arms. That's why …
When a Chinese construction worker quenches his thirst, he'll reach for a Coca-Cola …
When an Indian programmer gets ready for work, she'll grab a tube of Colgate …
And when a Brazilian corn farmer tends to his crops, he'll ride a John-Deere tractor.
Plus …
Most of the Best Dividend-Paying Companies Enjoy Steady Demand, In Good And Bad Economic Times
Even during a recession, nearly all U.S. consumers still take their medicine, buy groceries, and pay their heating bills.
Some examples:
Eli Lilly has been selling its prescription medications through booms and busts. So it comes as no surprise that the company has been paying dividends for more than century!
Supervalu is one of the largest food wholesalers in the U.S. (as well as one of the largest supermarket retailers). And the fact that people always have to eat has allowed the company to reward shareholders with dividend payments as far back as 1936.
Like clockwork, everyone in my neighborhood writes monthly checks to Florida Power and Light. And like clockwork, the company writes out checks of its own … to its shareholders.
Smokers? They reach for cigarettes day in and day out. Thus, Altria (formerly known as Philip Morris) enjoys steady demand for its major product. No wonder the stock currently yields almost 4%!
I could go on and on … but you get the idea.
Well-established firms, with economically insensitive businesses are the same companies that reward shareholders with regular payouts. The two concepts go together like peanut butter and jelly!
Even in Turbulent Stock Markets, Dividend Payers Hold Up Better
Now, the companies I mentioned today are just examples, not necessarily my current favorites. But I think they really demonstrate how and why some of America's top companies are able to weather a falling dollar and a weak U.S. economy.
The good news is that these kinds of companies can also help your portfolio weather the very same storms. In fact, even when Wall Street hits the skids, dividend-paying stocks hold up far better than shares that don't have yields.
The evidence is abundant, but let's look at a recent example:
- 2002 was one of the worst years for stocks in decades, with the S&P 500 falling 23%
- Non-dividend-paying stocks in the index plummeted even more — 30%
- In contrast, the index's dividend-paying stocks lost only 11%!
Am I saying that you want to be holding lots of dividend-paying stocks just because they'll lose less money than other issues? Of course not! Rather, the fact is that, historically, they have performed much better during rough patches.
Plus, when the markets are trading sideways, you'll be getting paid to wait.
And when U.S. shares resume their climb (as they always have), your portfolio will be ready and willing to move higher, too.
So …
For A Virtually Bullet-Proof Portfolio, Here's What I Suggest
First, always keep a nice chunk of change in liquid investments such as money markets or Treasury-only money funds.
Second, don't ignore the growth happening overseas. Consider holding some of the foreign investments that our Money & Markets editors have been telling you about.
Third, if you want to protect your portfolio against the falling dollar and rampant inflation, use natural resource investments, which are great hedges.
Fourth, don't completely abandon the U.S., either. In my opinion, dividend-paying companies are a way to stick with the U.S. through thick and thin.
Sincerely,
By Nilus Mattive
P.S. To read my free report on 16 great dividend-paying U.S. companies, click here .
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