Boost Income With The Currency Kicker

U.S. investors who buy foreign stocks for their yield are often disappointed.

After all, both the principal and income can be hit by currency declines, and some of the yield goes to tax before you get it.

This is especially true in 2015 because the dollar has been strong against almost all other currencies.

However, that trend seems likely to reverse going forward. That means we should look for foreign income stocks that can give us the triple whammy of a nice dividend, a capital gain from the currency rising, and an increase in the dividend in dollar terms.

The Currency Connection

Here’s an example, just to illustrate how this might work.

Suppose you spend $1,000 to buy 100 shares of a Canadian stock trading at CAD 13.10 at today’s exchange rate of CAD 1.31 = $1. The stock is paying a dividend of CAD 0.524 per share, which translates into $0.40 per share and a 4% yield.

The following year, oil prices rise a bit, and the oil-dependent Canadian dollar rises to CAD 1.09 = $1, a 20% increase. If the Canadian market stays steady, your Canadian shares are worth $13.10/1.09 = $12, a nice 20% gain.

Meanwhile, your income of CAD 0.524 per share has also risen in U.S. dollars, to $48 on 100 shares, giving you a nice 4.8% yield on your initial $1,000 investment. That’s a pretty nice result.

Thus, with one currency move in the right direction you can boost both your income and your capital.

Of course, you still need to figure out which currencies are going to move in your direction in the next year. After that, you should look for solid income stocks in those countries.

Specifically, you’ll want to look toward mostly domestic stocks, such as retailers and local financial institutions, because a big rise in the currency will be reflected in lower income for exporters, who may struggle financially.

Down But Not Out

In a year when currencies have been so volatile, the best bet for sharply rising currencies is those that have fallen the most against the dollar.