How to Profit From the Falling Loonie

Invest in Canadian stocks that pay U.S. dollar dividends. Gordon Pape has some suggestions.

It’s hard to say how far the loonie will drop. The Bank of Canada’s statement last week made it clear that any interest rate hike is a long way in the future and suggested that Governor Stephen Poloz and his team think our dollar is still overvalued, even after its big decline.

Meantime, the U.S. Federal Reserve Board is taking steps that will have the effect of strengthening the greenback by cutting back on its quantitative easing (i.e. printing money) program. The tapering process began this month with a drop to US$75 billion in bond purchases (from US$85 billion) and there is speculation the Fed will announce a further reduction at its meeting this week. That appeared to be the main catalyst in Friday’s big drop on the stock exchanges.

So we have two currencies moving in different directions. Often these situations result in an overshoot and that could happen here with the loonie. Some economists now predict our currency will hit US$0.87 in the next few months. It could go even lower.

Realistically, we should not expect any significant rally in the loonie before mid-year and that will only happen if we see an improvement in GDP growth and a boost in commodity prices.

Of course, you can always buy U.S. stocks and ETFs but here’s an angle that may not have occurred to you: invest in Canadian stocks that pay dividends in U.S. dollars. That way you can claim the dividend tax credit if the shares are held outside a registered plan.

You may be surprised to learn there are quite a few Canadian companies that pay U.S. dollar dividends. Here are some to consider, drawn from the Recommended List of my Internet Wealth Builder newsletter. The yields may seem low but don’t forget you’re getting a currency bonus of 10%+.

Agrium (TSX, NYSE: AGU).  This Calgary-based fertilizer producer was originally recommended by in April 2007 at C$46.41, US$41.40. It closed on Friday at C$98.78, US$89.19. The shares pay a quarterly dividend of US$0.75 (US$3 annually) to yield 3.4% at the current price. The company last week reduced its earnings guidance for the fourth quarter because of low prices for potash and other nutrients. As a result, the stock sold off, boosting the yield in the process and creating an entry point.

Barrick Gold (TSX, NYSE: ABX). Gold mining stocks haven’t been kind to us in the past year however Barrick shares have rallied back from their 52-week lows by about 50% in Canadian dollar terms, 44% in U.S. dollars. Although the dividend is paid in U.S. currency, it is highly unpredictable as it is tied directly to profits. For the year to May 2013, Barrick was paying US$0.20 per quarter but last August the dividend was slashed to US$0.05 (US$0.20 annually) for a yield of only 1.1%. Choose this one only if you think the gold rally will continue, resulting in an increase in the stock price and the dividend.

Brookfield Asset Management (TSX: BAM.A, NYSE: BAM). This giant conglomerate has its fingers in a variety of businesses, from real estate to power generation. It has been on our Recommended List since 1997 when it was trading at a split-adjusted C$6.19. It closed on Friday at C$41.67, US$37.61. The dividend isn’t huge – US$0.15 per quarter or US$0.60 a year to yield 1.6%. But Brookfield has raised its pay-out several times in the past couple of years so there could be more on the way.

Constellation Software (TSX: CSU, OTC: CNSWF). This little-known technology company has been a huge success. It was recommended in October 2012 at C$104.50, US$105.92 and now trades at C$226.32, US$204.36. The shares pay a quarterly dividend of US$1 (US$4 annually) to yield about 2%. The company’s third-quarter results showed a year-over-year profit increase of 29% to US$54 million (US$2.55 per share, fully diluted). There’s room for a dividend increase this year if the directors decide they want to go that route.