Many income-seeking investors neglect one of their best protections against inflation and credit risk: International equities that pay dividends in a foreign currency.
The Lifelong Income Portfolio features dividend-paying names from Australia, Europe and Canada that are easy for US investors to buy and hold. But the value of their dividends and share prices fluctuate with their home currencies.
Of course, currency diversification can be a double-edged sword.
Over the past 12 months, for example, the Canadian dollar’s value has dropped from about par to US$0.92, reducing the value of the country’s equities and dividend by an equivalent degree.
The Canadian dollar has lost ground for several reasons. Economic growth in China, an important customer for the Canada’s natural resources, has slowed significantly in recent years. Meanwhile, the consensus estimate calls for Canada’s gross domestic product (GDP) to expand at a slower rate than the US in the near term.
The Bank of Canada has also discussed loosening its monetary policy to stimulate growth–a sharp contrast to the Federal Reserve, which has started to taper its quantitative easing and eventually plans to raise interest rates.
But Canada’s weakness likely will prove short-lived. For one, the country’s fiscal balance sets it apart from the nations with yawning trade and budget deficits. Moreover, Canada’s economy will benefit from strengthening GDP growth in the US; our neighbor to the north is our largest trading partner.
And although China has reined in its horns, India could pick up the demand torch; newly elected Prime Minister Narendra Modi aims to replicate China’s massive build-out of critical infrastructure.
A lull in Chinese demand doesn’t diminish the long-term value of Canada’s abundant natural resources, which bodes well for US-based investors who hold dividend-paying equities from north of the border.
But despite their home currency’s recent weakness, the three Canadian names in the Lifelong Income Portfolio in 2014 have all eked out positive returns in US dollar terms: