As you may or may not know, currency fluctuations significantly affect US dividend investors. In fact, in a recent survey conducted by the Pennsylvania-based AvantGard Company, it was discovered that fifty-nine percent of the 275 people that participated in the poll stated that currency fluctuations resulted in a loss or gain of at least five percent in the past year ending in March 31, 2010. These numbers are up forty percent when they are compared with the previous year’s survey.
“The majority of corporations are in the business of doing business, producing and manufacturing, not hedging currencies,” said Paul Bramwell, a senior vice president of Treasury solutions at the AvantGard unit of SunGard in Connecticut. “A lot of companies were caught unawares by volatility.”
As of this year, the euro dropped eleven percent against the dollar. On May 6, 2010, the euro fell to a fourteen month low of $1.2529. The currency fluctuations are definitely having an effect on large companies as well. For instance, the recent currency rate swings caused eBay Inc to make the announcement in 2009 that the currency fluctuations would decrease earnings by ten percent. In addition, the currency volatility also did cause Johnson & Johnson, McDonald’s Corp and DuPont Co to state that the declining euro was having an impact on their earnings or that the declining currency rate may decrease growth.
“If you have an increase in profits but it’s wiped out by foreign-exchange loss, that’s significant,” Bramwell said. “What they should be doing, and increasingly are doing, is looking at where the exposure lies, instead of waiting for an earnings call to announce FX losses.”
That said, the ability of businesses to pay dividends depends on the businesses’ earnings, money management techniques and cash flow. Lately, due to the recession, many people have expressed concern about the US dollar strength and status. Many people believe that the large US debt and/or printing more US currency will diminish the value of the US dollar . Further, some experts believe that any US currency dollar value change will have a much larger effect on the figures. In fact, they think that investors should look at the situation as whole and determine the long term future of these dividends.
For instance, while many people believe that printing more dollars will increase inflation numbers and then will reduce the value of the dollar, there are others that believe that governments of many other countries would use this technique as well. Thus, the combined effect of all of the countries printing more currency and in turn reducing their country’s currency values would be nil.
Therefore, in order for dividend investors and forex trading market investors to make sense of the current market conditions, some experts suggests that investors find dividend companies that gain their earnings from international operations. Why? Investing in businesses with global operations is simply the best hedge against currency fluctuations.
Other firms suggest that investors seek out a portfolio of fairly conservative, high dividend paying, non-U.S. equities. These experts suggest this type of portfolio as:
- These types of portfolios usually pay high dividends – and many of these items qualify for a lower dividend tax that is in effect (see qualifier if you file taxes online).
- As these types of dividends are paid in the companies’ local currencies, the value of these dividends – along with the value of the shares itself – rises when the dollar falls
All in all then, fluctuating exchange rates do have a significant effect on US dividend investors.
This was a guest post by Vincenzo Desroches from Forex Traders