Wednesday, September 30, 2009

* Protecting Your Dollars With Foreign Currency

In late 2007 when I starting writing about dividend investing I had two primary motives in mind: 1. Put myself in a position where there is some public accountability. 2. Interact with knowledgeable investors and expose myself to new ideas. In response to a recent post "How Much Money Will You Need For Retirement?", two readers introduced me to a concept that hadn't considered up to that point.

First, some background. As a result of massive and growing deficits in The United States and our willingness to print enormous sums money meet our increasing obligations, many have called for the collapse of the U.S. dollar. Tim Hanson in a recent article quoted the following:
  • Swiss banker Dr. Konrad Hummler wrote "It's time to take advantage of the recovery of the U.S. dollar to get one's currency diversification in order." (i.e. get out of dollars)
  • Warren Buffett wrote in the NY Times "Fiscally, we are in uncharted territory" and concluded that "Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar's destiny lies with Congress."
  • Bill Gross of Pacific Investment Management Co. (PIMCO), which manages the biggest bond fund in the world, advises investors to sell dollar investments 'before the central banks and sovereign wealth funds do'.
  • Commodities specialist Jim Rogers announces his new favorite currency -- the Chinese yuan.
I have long recognized the importance of holding international investments. In addition, to international funds held outside my income portfolio, I hold individual dividend stocks with large global presences such as: The Coca-Cola Company (KO) - Analysis, Johnson & Johnson (JNJ) - Analysis, The Procter & Gamble Company (PG) - Analysis, McDonald's Corporation (MCD) - Analysis and Wal-Mart Stores, Inc. (WMT) - Analysis.

However, when it comes to debt I am 100% invested in U.S. debt funds. In response to the article referenced in the opening paragraph, two readers who read it on Seeking Alpha left some intriguing comments as follows in part:
Mad Hedge Fund Trader said "A number of readers have asked me to come up with a safe, high yielding investment in which to hide out in case the equity markets swoon again. That means they are looking for a security that offers a high fixed return, denominated in a strong currency that will benefit from future upgrades that will boost the principal over time. All of that is another name for the Invesco PowerShares Emerging Market Sovereign Debt ETF (PCY). The fund [...] pays a handy 6.42% dividend. This beats the daylights out of the nine basis points you currently earn for cash, the 3.40% yield on 10 year Treasuries, and still exceeds the 6.42% dividend on the iShares Investment Grade Bond ETN (LQD), which buys predominantly single “A” US corporates. The big difference here is that foreign bonds are issued in strong foreign currencies instead of weak dollars, and have a rosy future of further credit upgrades to look forward to.

Old Trader added "TEI and GIM are a couple of other foreign debt funds to consider. Templeton Emerging Markets Income Fund (TEI) is primarily emerging markets, Templeton Global Income Fund (GIM) is global sovereign...both are run by Templeton. "
You can read their full comments and others here.

Up to this point I had assumed that non-U.S. debt would have the same variability as non-U.S. dividends, which I deemed as unacceptable for my income portfolio. I ran some quick numbers on PCY's dividend comparing it to LQD. Surprisingly, its standard deviation from 11/07 to 9/09 was 0.01489 compared to 0.02817 for LQD over the same period (Yahoo data + iShares to fill in some LQD blanks). LQD is one of my core bond holdings, but it is quickly approaching full allocation, so I've been looking for some other alternatives. A higher yield and lower standard deviation on its dividend makes PCY worth looking into. I also plan to spend some time looking at TEI and GIM.

Full Disclosure: Long KO, JNJ, PG, MCD, WMT, LQD. See a list of all my income holdings here.

(Photo: ilker)

Tags: [GIM] [JNJ] [KO] [LQD] [MCD] [PCY] [PG] [TEI] [WMT]