Canadians are now more confused than ever as to whether or not they should invest in the US market. There are many factors playing in investors' minds at the moment. Before we tackle the currency challenge, let's take a look at how both the US and Canadian markets did over the past 10 years:
As you can see, while the Canadian market had its moment of glory between 2008 and 2012, the US market easily crushed the Canadian market since then. The reason is quite simple; the US economy is more diversified and not dependent on natural resources. This becomes even more obvious when we look at the past 12 months:
Moving Funds to the US was the Right Move… 3 years ago
I started to build my dividend growth portfolio back in 2010. During 2012 and 2013, I invested most of my money into US dividend growth stocks. I did this move for two reasons: #1 I believed the US stock market offered better opportunities, #2 the Canadian dollar was trading at par:
The result of this strategy was simply amazing. While the Canadian market lost about 10% in 2015 and the US market was flat, my portfolio finished the year at +8.80%. This result was mainly due to the strength of the US dollar. Then again, the move to buy US stocks had to be done 3-4 years ago to benefit from it now.
Today, Canadian investors face a harsh reality: their stock market is tumbling as fast as their dollar. The question remains; where to invest?
Are US Stocks Still Worth It?
I have a strong feeling about the US economy.
Their stock market is well diversified and includes several companies better built than most mutual funds.
Their unemployment rate is hovering around 5% and the economy keeps cranking up more jobs each month.
New constructions are stable with over 1,1 million new homes annually.
Americans consumers represent 71% of the US GDP and they have been paying off debt over the past couple of years.
This leaves the consumer with great buying power for the years to come.
Now, this is great if you are American as you don't need to worry about the currency impact. However, it is still worth it if you are Canadian?
When you have a short-term view, you may think that when oil prices climb back up, the loonie will gain maybe $0.05, $0.10 or even $0,20. Therefore, if you invest in US stocks, no matter what they do, you are vulnerable to a 5%, 10% or even 20% drop in your investment value. That's a very good point. However, the currency movement is a one shot deal as the currency exchange movement doesn't have a compounding effect. As you should know by now, the true power of dividend growth investing comes from the compounding magic.
I wanted to backtest this affirmation. This is why I've used YCharts and went back as far as their data could go to illustrate the USD vs CAD movement. I was able to go back to 1972 when the CAD was worth the same thing as the USD (more or less). Therefore, in 44 years, the impact of the dollar is roughly 42%. This is what you would have gained if you had only played on the currency. 42% over… 44 years… do I really have to tell you that it was a bad investment?
Just for fun, I picked a few "classic" dividend growth companies to see what their growth looked like during the same 44 years. Here are the results:
As you can see, we are talking about thousands of percent in investment return vs 42%. Do I have to mention this doesn't even include the dividend payment?
Now… you are going to tell me that #1 I picked a time in the history where both dollars were worth about the same thing, which obviously is not the same situation as today since the Canadian dollar is at lower level and #2 those companies skyrocketed during this period and it is less likely to happen in the future.
All right, let's take a more appropriate moment then with 1986 where the USD was worth $1.40, a similar situation to ours today and let's stop the comparison on January 2008 when the Canadian Dollar was full speed ahead. The difference between 1986 and 2008 in the currency exchange is almost 30%. If you had changed your Canadian dollars in 1986 for US dollars and look back at their value on 2008, you would have lost. Then, let's take a look at the same companies to see how they performed, just to be fair:
Here again, we are talking about the same results: thousands of percentage in returns vs a loss of 30%.
Just to make sure you don't accuse me of using old data that doesn't matter anymore, I checked when the most recent time when the CAD was trading at a low level. This was in March 2009, where the USD worth $1.27 CAD mainly due to the drop in oil prices and the hope of a stronger US economy. If you recall, this was also the month of the perfect entry point from the 2008 crisis. Once again, here's how the currency and the stocks reacted:
We obviously don't discuss thousands of percent over a short period of 7 years. However, it is interesting to see that the currency movement was nearly 10% (a gain for Canadian since the USD is now stronger than in 2009). Did you notice the weakest stock is up 65% (always consider to add the dividend) and the best performing stock is up 225%?
Overall, I did three comparisons with three different contexts and different timeframes. However, I always get to the same conclusion: US stocks outperform significantly the currency exchange movement in all cases.
So, back to our original question; are US stocks still worth it? The answer is yes.
Where to Start to Find Strong Dividend Growth Stocks?
I believe investing in the US market is a good idea. However, it doesn't mean that any stock will do it. This is why it is even more important to be selective with the choice of your US stock considering that you may suffer a 20% loss over a short period of time (assuming oil goes up and pushes the CAD higher).
Now, do you still think it is not the time to buy US stocks?
Disclaimer: I own shares of KO, JNJ and MMM.