Dollar Driving Dividend Stocks

This story features MACQUARIE GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: MQG

By Peter Switzer, Switzer Super Report

Despite the dollar’s refusal to succumb to gravity, even despite falling iron ore prices, if we take the view that eventually the US will have to raise interest rates, which will push up the greenback and push our dollar down, then let’s try for the double play where we are set for stocks that enjoy the currency effect and which also pay dividends.

The Aussie outlook

Let’s start with the forecast for the little Aussie bleeder, which really has thrown off its old, less impressive tag.

Why does it remain so strong? Try these:

• The ECB cut interest rates and the euro fell, pushing our dollar up;

• Capital expenditure in the second quarter was up a strong 1.1%;

• The GDP rise of 0.5% for Q2 was better than the expected 0.4%;

• Charts don’t point to a fall any time soon, with 92.7 US cents a pretty strong support level; and

• The US Fed is delaying its first rate rise until it’s sure that the stock market and the economy will cope with it.

A lot of forex forecasters are now becoming bearish on the Aussie dollar but I think the Fed still holds the key to the timing of the bear-dive.

The technical support for the dollar

The Australian dollar/US dollar graph below shows the support and resistance lines on it. As you can see, gravity is having trouble bringing the dollar down.
 

But it should come down. This is what currencies.co.uk had to say recently: ”Given that the RBA (Reserve Bank Australia) has already indicated it does not want the AUD too strong, we could see the AUD weaken again in the future.”

The Yanks could help

Recently, the Fed President in Philadelphia, Charles Plosser, argued that the US central bank has to be careful leaving rates too low for too long.

“We must acknowledge and thus prepare the markets for the fact that interest rates may begin to increase sooner than previously anticipated," he told a meeting of bankers. "I am not suggesting that rates should necessarily be increased now…but our first task is to change the language in a way that allows for lift-off sooner than many now anticipate and sooner than suggested by our current guidance."

A few months ago we thought it would be the third quarter of 2015 and then mid-year was favoured, and still is, but some think March is possible. Ultimately US economic data will determine it and disappointing job numbers, such as those in August where only 142,000 jobs showed up in the US, compared to the 225,000 that were expected.

So if we accept that the dollar will do a Coles prices, eventually and “go down, down”, what stocks that pay OK dividends would be beneficiaries?

Here’s my list with commentary:

 • Macquarie Group ((MQG)) — dividend yield is around 4.47% but it is only 40% franked. The lower dollar will raise the $A value of its overseas earnings so there is capital gain potential.

• Navitas ((NVT)) — yield is now 3.59% and the share price has fallen from $7.88 to $5.43 but my news says the loss of the Macquarie Uni business will be more than made up from other contracts. It’s fully franked.

• Amcor ((AMC)) — the people who watch this company say it’s a good’un and with current yield at 3.83% and earning a lot of its income in the US, a lower dollar would be a bonus. Only problem is that its share price is $11.22 and the 52-week high is $11.55. Still a lower dollar should help this go higher. Another problem is that it’s an un-franked stock, so what you see — yield-wise — is what you get.

• Fortescue Metals ((FMG)) — for the courageous who believe China and the iron ore price will come good. (Macquarie thinks this!) Its yield is 5.1% — a low share price will do that. Share price is now $3.92 while its high over the past year was $6.22, so if the news gets better, there is upside but it’s a gamble.

• For the mad, bad and dangerous, QBE Insurance ((QBE)) is a lower dollar beneficiary but are you prepared to punt on the management and the landmines that have been planted in those more exotic plays in places such as South America? Its yield is only 2.28%, so you are playing this once dividend stock, for capital gain.

• Here’s one I like and it’s a bit outside the square but it’s STW , which is the SPDR S&P/ASX 200 Fund. This is an ETF. If you agree with me that a lower dollar will drive the index up, then this has to be a winner. And with franking credits, this is a 5% plus yield and you get the capital gain, which I reckon will easily be 10% over a year.

Meanwhile, you could do worse than Macquarie and Navitas.

Many of these will do well when the dollar falls but the current yields are generally only cream on the cake. I think the STW play is a pretty good idea with a 4.2% yield plus 49% franked dividends, which adds to the appeal, given I think the market has at least two good years to run and no one I respect is arguing with me over my call.

We await the Fed and Janet Yellen’s first big hint that US rates are set to go higher.
 

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

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