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Greenback Not So Green? Income Investors May Not Need To Worry

|Includes: CEL, CPL, ED, KO, MCD, The Procter & Gamble Company (PG), RDS.A, T, VZ, XOM
Jim Trippon: Greenback Not So Green? Income Investors May Not Need To Worry

One thing that a lot of income investors don't take into account when building their portfolios is the strength or weakness of the U.S. dollar. Let's be honest, the dollar has been pretty weak for a long time, but in small doses, dollar weakness can actually be a strong opportunity for income investors.Of course we cannot forget about the problems inflation can cause for any assets denominated in U.S. dollars. Inflation can have a harmful impact on a portfolio that is attempting to generate income, diminishing the purchasing power of the earned income.

Fortunately, there's a remedy to combat inflation as well and income investors would do well to take advantage of it. Benefiting from dollar weakness and hedging against inflation brings us back to international dividend stocks. This isn't a bad place to be as stocks in the developed world outside of the U.S. are currently yielding an average of 4% compared with about 2.5% for the S&P 500. Additionally, more foreign firms pay dividends and the pay outs are usually heftier in dollar terms. Let's take a look at why income investors need to go global to beat a falling dollar and inflation.

Benefiting From Dollar Weakness

Let's keep things in the States for a minute. As we said, a weak dollar can be a good thing in small doses for U.S.-based companies that get a good percentage of their sales from overseas. Companies like Procter & Gamble (NYSE: PG), Coca-Cola (NYSE: KO) and McDonald's (NYSE: MCD) depend on international sales to bolster their bottom lines. Obviously, these sales are denominated in the currency of the point of sale and then converted back to U.S. dollars because these companies are based in the U.S. So when the dollar is weak, multinational companies are actually able to boost their profits and higher profits can lead to higher dividends.

Greenback Not So Green? Income Investors May Not Need To Worry

The same principle applies to foreign stocks. Most foreign stocks listed on U.S. exchanges pay their dividends in their local currency. So if you own a stock that pays its dividend in euros (a good idea at this point), your dividend will be converted back to (more) dollars. That's just one benefit of foreign dividends.

The next benefit you're sure to love is the tax benefits. If you're getting dividends in euros from a French company, you're dividends are taxed in France and then are tax exempt in the U.S. so you're not subject to the 15% dividend tax rate.

Fighting Inflation

In your quest to combat inflation, you can mix in some U.S. stocks, but you'll want to ensue their reliable dividend payers with a dividend yield that is superior to that offered by 10-year Treasuries. Make sure the pay out ratio is sustainable and that the company has the free cash to potentially raise the dividend.

Of course you'll want to mix in some international dividend payers as well for the reasons we've already mentioned. Inflation hampers the dollar's value and that will make your foreign dividends all the more valuable. At the end of the day, income investors don't need to fear a weak dollar or inflation. Think of those scenarios as profit plays.

International Dividends Rock

Trust me, there are plenty of reasons to include a few international dividend payers in your portfolio and we've already highlighted a few, but as the old saying goes "A picture is worth a thousand words" so have a look at the chart below that illustrates how global dividend payers put you in position to grow your portfolio over the long haul. Oddly enough, this chart's time frame is for the "lost decade" of 1999-2009.

Greenback Not So Green? Income Investors May Not Need To Worry
Credit: ING Funds

Not enough to convince you? I've got more stats for you. Let's compare a foreign stock against a U.S. stock from several different industries. Royal Dutch (NYSE: RDS-A) offers twice the dividend yield of rival Exxon Mobil (NYSE: XOM). Cellcom Israel (NYSE:CEL) will get you a yield of 12.1% while AT&T (NYSE: T) and Verizon (NYSE: VZ) offer an average of 7%. CPFL Energia (NYSE: CPL), a Brazilian utility, yields close to 7% while Consolidated Edison (NYSE: ED) yields barely over 5%. The list goes on. Frankly, I could tell you about many more oil, telecom and utility names based outside the U.S. that trump their American counterparts when it comes to dividends.

To further investigate the power of international dividends, my research team ran a screen for large-cap stocks (market caps of $10 billion to $200 billion) listed on the New York Exchange with dividend yields of 5% or better. Strip out three MLPs and we turned up 39 stocks, 22 of which were based outside the U.S. All of this points to one thing and that is getting your dividend passport stamped a few times can be very profitable indeed.

Committed to your Global Profits,

Jim Trippon

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