A quick and simple answer is, no it does not affect dividend growth if dividend investors understand what it really means.
Corporations pay dividends from the combination of profitability, cash flow, income, prudent money management, etc. With the current state of economy in United States (and other parts of the world) majority of the corporations are facing negative growth. In such a scenario where will dividend growth come from? In these challenging environment 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.
We read a lot about demise of US dollar. At a very fundamental level, which country’s currency becomes a global currency will depend upon political maturity and economic stronghold at global level.
- United States: Every nation in this world wants to do business with US because of its strength in free market system, strength of its institutions, innovative and entrepreneurial business environment, and open minded consumer base. History shows us that every bust is followed by a boom albeit of a different economic form or shape or pattern. Looking back 100 year or more we can see boom and bust in different sectors such as first in textile industry, then infrastructure industry, then automobile industry, then space and airline industry, then hardware and software industry, and finally real estate and financial industry. The present financial crisis may shrink US GPD by couple of trillion dollars from 13 trillion, but still it will be the largest economy.
There is definitely some rational logic behind demise of dollar and I would agree to most of them. However, there is fundamental flaw in this chain of reasoning. While there is lot of talk of demise of dollar, it does not talk about its replacement? Which currency in the world will replace US dollar? There is also a lot of discussion that emerging markets (particularly BRIC nations) will be the driver of global economy. In order for BRIC nations to provide leadership at global stage, these nations have to demonstrate political maturity and economic foresight to the global citizens.
- China: It has a long way to go in demonstrating trust among in own people first and then among League of Nations. History suggests that world domination comes only after prosperity of its own citizens. A nation cannot dominate beyond its borders with struggling and constraint population. It’s currency, Yuan, has trust issues among the global nations. Who wants to trade in Yuan?
- Brazil: It is still just a potential and needs to show political maturity and independent thought at world stage.
- India: It is too diverse, too much democratized, and busy with inconsequential bickering with neighbors. It’s economy is growing but still not in top five to have any meaningful bargaining power. It’s currency, Indian Rupee, is still searching an identity and role at world stage.
- Russia: It may perhaps have some legacy military strength; however, it is still confused between communism and free market economy. Its currency, Rubble, is no way near to be global currency.
- Japan’s stagnant economy and aging demographics is not able to support the cause of Yen being global currency.
- The nearest contender is European Euro. Last few years it has thrown challenge to the US Dollar’s status. I believe the issue with Euro is that it represents the bigger economies (e.g. UK, France, Germany, etc) and smaller economies (other European nations). It represents multiple countries. Other than the largely available European market, it does not have any other argument or bargaining strength. Individual countries still continue to use their own currencies and have not shows any inclination to phase it out. I believe it is still in its infancy, in a sense that it still needs to shows its resilience amidst fragmented political landscape.
While in long term evolutionary basis, 30 or 40 years down the line, one may see the change, but I don’t expect this to see within next 20 years time frame. I would go only so far as saying that for next 12 to 20 years, BRIC nations will be the catalyst in real global growth and corporate earnings. Here in US we are facing some head winds and perhaps may continue to do so in near future. I cannot predict when this will end.
I can say that in next 10+ years, there will be quite a large number of US and other multinational corporations that will still standing on their own strengths. There are quite a few corporations that are well positioned to continue their growth in developed markets and emerging economies. Mentioned below is the list of companies that are deriving their revenue (and hence earnings) from all types of economies. Figures in bracket indicate approximate percentage revenue from emerging markets. Most of these corporations have paid growing dividends in last five years as measured in their native currency.
- Proctor and Gamble (35%)
- Unilever (30%)
- Johnson and Johnson (60%)
- Qualcomm Inc. (60%)
- Intel Corporation (50%)
- International Business Machines (45%)
- Microsoft Corporation (33%)
- ABB (27%)
- The Coca Cola Company (60%)
- Pepsico Inc. (50%)
- Cadbury PLC (24%)
- Nestle (26%)
- Siemens AG (23%)
- Vodaphone PLC (20%)
- Exxon Mobil Corporation (60%)
I cannot predict what will happen to the value US Dollar and/or future growth from emerging markets. Dividend growth investors have many choices to position themselves which will blunt the effect of these issues. Invest in dividend growth companies that have notable presence in all markets. After that, the discussion of dollar demise becomes purely academic in nature.
Another option is to simply track Dow Index which can done by Dow Diamonds (DIA).
Full Disclosure: Long on PG, UL, PEP, JNJ, and INTC