Inflation and the Dollar: Strategic Hedging in a Down Economy
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Due in part to quantitative easing (QE), recent actions by the Federal Reserve, and other negative externalities, the U.S. dollar could be headed for some trouble. One way to sidestep the oncoming currency crisis and current/future inflation is to hedge into foreign currency. Currently, a lot of investors are fleeing to the safety of gold and other commodities that produce no passive income; there's a better way to hedge inflation.
Here's what it is. First choose a stable currency. For the sake of our analysis we'll examine the Swiss franc, the British pound, and the Canadian dollar. Next, pick an American Depository Receipt (ADR) whose company you know well, as Buffett astutely and routinely comments "invest in what you know." Perhaps, a perfect long-term play between on the commodities market can is Royal Dutch Shell (NYSE: RDS-B). As such, Royal Dutch is a perfect example of an inflation-resistant commodity play in energy. On top of this trait, it offers a monster dividend, currently pegged at 5.30%, which because it's an U.K.-based entity has the added bonus of no foreign dividend withholding taxes, with quarterly dividends issued in pounds sterling, which are then converted to U.S. dollars and paid to shareholders accordingly. Therefore, investors reap the full benefit the foreign currency provides by being diversified by the dividend payouts. Overall, it's a pretty solid deal.
Next, we'll look at UBS (NYSE: UBS), one of Switzerland's most prominent and financially sound institutions. Like Royal Dutch, dividends are paid in the foreign currency, in this case Swiss francs, one of the most stable currencies in the world. Again, dividends are paid by the parent company (i.e. UBS) and then converted to dollars receivable to U.S.-based shareholders. Pretty straight forward.
Last, we'll examine Toronto-Dominion Bank (NYSE: TD), a Canadian financial institution. As you might imagine, dividends are distributed in Canadian dollars, which currently is significantly more stable and with greater upside to the U.S. dollar; and similarly, once declared, those monies are then converted to U.S. dollars giving investors more bang for the buck. As a final note to help sweeten the deal, TD offers periodic a premium dividend of 1% (please see my other post) on monies reinvested in their dividend reinvestment plan (DRIP), which is outstanding in my opinion.
As mentioned earlier, with all these investments what's significant and what separates them from commodities like gold ETF's is each one produces passive income, where the ETF's do not. I strongly believe this is a significant advantage to investors, since, at least at the current moment; dividend income is tax-advantaged and very easy to collect.
These are just a few! There are even more foreign dividend stocks. While, no stock is a sure thing, each one has its advantages and disadvantages and must be carefully weighed prior and during investment. But some ADR's are a lot better quality than others. By examining each opportunity carefully, you'll go a long way toward improving your investing skills and learning how to separate out the most attractive investments, foreign dividends, or otherwise, from the rest.
This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact. dmercer1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!