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The Dollar’s Strength Drives Dividends

September 26, 2019

Bashing the US dollar is one of the long-standing hallmarks of the financial newsletter publishing industry.

The idea is that inflation, government spending and debt as well as the lack of personal savings and a fever to consume, not to mention trade imbalances, all mean that the US dollar is doomed.

The old guard would then espouse buying Swiss francs as a way to defend against the inevitable collapse of the dollar. And in fact, when I returned to the US in my earlier career, it was the fever to bash the dollar that caught my attention.

Back in the early 1990s, I joined a bank in Saint Louis. And with a couple of my friends and business partners, we went on to form a division inside the Capital Markets of the bank to offer non-dollar deposits. We would go on to found currency, global bond and stock trading desks that expanded into managing non-dollar accounts.

This got the attention of newsletter editors that lit up our phones with subscribers wanting to invest. This led to my involvement with the publishing industry.

But for me, it wasn’t about bashing the dollar. Instead, it was about looking at other currencies and markets for what was working for them. I developed the concept that currencies are like the stocks of nations. And in turn, improving fundamentals drive currency prices much like they do for stocks.

The US dollar continues to have better fundamentals than most major currencies. The dollar, as measured by the Bloomberg Dollar Index, is up over the trailing year by 3.29% against the leading currencies in financial and trade transactions.

Bloomberg Dollar Index—Source: Bloomberg Finance, L.P.

And against individual major currencies year to date, with the exception of the slightly recovering Canadian dollar and Japanese yen, the US dollar has been the currency of choice on a year-to-date basis.

What is Driving the Dollar’s Strength?

I’ll start with the yield advantages of the US markets. The US markets have significant yield advantages because yields for other nations’ bonds are largely in negative territory.

There’s currently around $15.04 trillion in dollar terms tied up in negative-yielding bonds, which would be even higher if the dollar wasn’t so strong.

Amount of Global Negative-Yielding Debt—Source: Bloomberg Finance, L.P.

Then there is the performance of US stocks, which are vastly outperforming major global markets. The S&P 500 and Nasdaq Composite Indexes have outperformed every single major stock index in US dollar terms year to date, many by a wide margin.

The US economy, with its strong labor market conditions, is fueling a strong consumer segment that’s growing at significantly better rates than the rest of the globe. And this is set to further improve in favor of the US.

All of this means that the US economy and markets are much more compelling destinations over the rest of the major economies and markets. And this shows up in the massive surge in net investment flows into US stocks, bonds and other securities.

The US Treasury monitors this and for the year to the most recently reported month, the amount of net inflows has gone up 175% to $84.26 billion.

US Foreign Net Transactions—Source: US Treasury & Bloomberg Finance, L.P.

The US dollar, economy and markets are the places to be even with trade-negotiation challenges, made slightly easier with the trade deal with Japan yesterday.

How to Cash In

I’ve been focusing on US-focused companies and their stocks, including real estate investment trusts (REITs) and utilities. Both of these segments have been delivering ample returns year to date.

On average, REITs yield 3.69% and have returned 27.43% for the year. Utilities on average yield 3.01% and have returned 25.24%. Both have outperformed the S&P 500 and tech-laden Nasdaq Composite Indexes.

Bloomberg US REITs (White) & S&P Utilities (Orange) Total Return—Source: Bloomberg Finance, L.P.

And US bonds, particularly US corporate bonds, have been doing exceedingly well year to date. The Bloomberg Barclays US Corporate Index has a return of 12.67%, all with a yield to worst (taking into consideration calls on bonds in the Index) of 2.97%.

Bloomberg Barclays US Corporate Total Return Index—Source: Bloomberg Finance, L.P.

But I would also argue that dividend and income investors might do well not just with the bigger segments, but with smaller US-focused companies as well. Inside my Profitable Investing advisory, I have many REITs and utilities, but I also have numerous stocks of US-focused companies that are outside major indexes and less susceptible to major swings on any given day. And these pay very handsome and sustained dividends.

A few to look at include MFA Financial (MFA), which is an alt-financial company set up as a REIT for tax and administrative purposes. It pays a dividend yield of 10.49%. It remained profitable and continued to pay its dividends even during the 2007-2008 financial crisis.

With that dividend, MFA has returned 20.65% year to date, yet it still is a value to buy right now.

Another similar company is TPG Specialty Lending (TSLX), which is in the business of corporate lending and investment. It pays an annual dividend yielding 8.48%, including regular quarterly distributions as well as regular additional dividend distributions.

TSLX has returned 23.94% year to date, and it too is a great buy today.

All My Best,

Neil George
Editor, Dividend Digest & Profitable Investing