Will a Strong Dollar Derail Your Dividend Stocks?
Hurray! The U.S. dollar is getting stronger! That means the purchasing power of U.S. currency is increasing compared to other international currencies. But did you know there is a very dark side to a strong dollar?
If you’re invested in blue chip dividend stocks, and you’re counting on dividend income to fund you’re retirement, pay attention to this post. It could be the wake up call you need to get out of harms way.
How a Strong Dollar Hurts U.S. Companies
When the U.S. dollar trades higher (compared to other currencies), it changes how international companies can do business. In particular, U.S. companies who sell goods and services abroad, face headwinds.
That’s because overseas competitors gain an advantage.
Consider a U.S. business who manufactures a product for $50 and sells this product in Europe. If the manufacturer charges 50 euros for this product, and the exchange rate is $1.30 for every euro, the company will receive the equivalent of $65. This gives our company a profit of $15 per item.
On the other hand, if a strong dollar changes the exchange rate so that each euro is only worth $1.20 in dollars, selling that same product for 50 euros will only fetch $60. That means our company’s profit will decline to $10 per item.
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So with a strong dollar, U.S. companies either need to raise prices for their international products, or accept lower profit margins.
Similarly, consider a company that generates profits of 100 million euros.
With an exchange rate of $1.30 for every euro, this company would book $130 million in profits. But if the exchange rate drops to $1.20 per euro, that changes things. Now, the same international profit only amounts to a reported $120 million in profits.
This is why it’s important to watch currency shifts if you’re invested in international blue chip dividend stocks.
The Strong Dollar Is A Red Flag For Blue Chip Dividend Stocks
Over the past few months, I’ve been keeping my eye on currency shifts. Recently, the strong dollar has raised my level of concern for blue chip dividend stocks.
I’m worried that if the dollar continues to rise, it could send blue chip stocks lower.
This will be a particular risk for companies with large international sales. A few of these stocks are Procter & Gamble (PG), Coca Cola (KO), and Philip Morris (PM). These are dividend stocks that many investors hold in their IRAs or 401k accounts.
All of these stocks are widely held dividend payers that most retirees believe are “safe” investments. And these are high quality companies with excellent business models. I’ve even recommended some of these blue chip companies to investors, and hold some of them in my Family Wealth Circle model accounts.
But the stronger dollar is a risk that investors will need to be aware of in the coming months.
Fortunately, for now, these stocks are trading higher and the companies continue to pay attractive dividends. That’s exactly what I want to see from dividend companies that I’m invested in. If this trend continues, we can continue to hold these positions and collect our income payments.
But keep in mind, many blue-chip dividend stocks are trading at premium valuations which makes them more vulnerable. The strong dollar could be the catalyst that begins to send these stocks lower.
Today, I recommend holding these stocks with tight stops. If they start trading lower, and the dollar remains strong, it’s probably time to take some profits off the table and reduce your risk.