Canadians are now more confused than ever as to whether or not they should invest in the US market. There are many factors playing in the investor’s mind at the moment. Before we tackle the currency challenge, let’s take a look at how both the US and Canadian markets did over the past 10 years:
source: Ycharts
As you can see, while the Canadian market had its moment of glory between 2008 and 2012, the US market easily crushed the Canadian market since then. The reason is quite simple; the US economy is more diversified and not dependant on natural resources. This becomes even more obvious when we look at the past 12 months:
source: Ycharts
Moving Funds to the US was the Right Move… 3 years ago
I started to build my dividend growth portfolio back in 2010. During 2012 and 2013, I invested most of my money into US dividend growth stocks. I did this move for two reasons: #1 I believed the US stock market offered better opportunities, #2 the Canadian dollar was trading at par:
source: Ycharts
The result of this strategy was simply amazing. While the Canadian market lost about 10% in 2015 and the US market was flat, my portfolio finished the year at +8.80%. This result was mainly due to the strength of the US dollar. Then again, the move to buy US stocks had to be done 3-4 years ago in order to benefit from it now.
Today, Canadian investors face a harsh reality: their stock market is tumbling as fast as their dollar. The question remains; where to invest?
Are US Stocks Still Worth It?
I have a strong feeling about the US economy.
Their stock market is well diversified and includes several companies better built than most mutual funds.
Their unemployment rate is hovering around 5% and the economy keeps cranking up more jobs each month.
New constructions are stable with over 1,1 million new homes annually.
Americans consumers represent 71% of the US GDP and they have been paying off debt over the past couple of years.
This leaves the consumer with great buying power for the years to come.
Now, this is great if you are American as you don’t need to worry about the currency impact. However, it is still worth it if you are Canadian?
When you have a short term view, you may think that when oil prices climb back up, the Loonie will gain maybe $0.05, $0.10 or even $0,20. Therefore, if you invest in US stocks, no matter what they do, you are vulnerable to a 5,10 or even 20% drop in your investment value. That’s a very good point. However, the currency movement is a one shot deal as the currency exchange movement doesn’t have a compounding effect. As you should know by now, the true power of dividend growth investing comes from the compounding magic.
I wanted to backtest this affirmation. This is why I’ve used Ycharts and went back as far as their data could go to illustrate the USD vs CAD movement. I was able to go back to 1972 when the CAD was worth the same thing as the USD (more or less). Therefore, in 44 years, the impact of the dollar is roughly 42%. This is what you would have gained if you had only played on the currency. 42% over… 44 years… do I really have to tell you that it was a bad investment?
Just for fun, I picked a few “classic” dividend growth companies to see what their growth looked like during the same 44 years. Here are the results:
source Ycharts
As you can see, we are talking about thousands of percent in investment return vs 42%. Do I have to mention this doesn’t even include the dividend payment?
Now… you are going to tell me that #1 I picked a time in the history where both dollars were worth about the same thing, which obviously is not the same situation as today since the Canadian dollar is at lower level and #2 those companies skyrocketed during this period and it is less likely to happen in the future.
All right, let’s take a more appropriate moment then with 1986 where the USD was worth $1.40, a similar situation to ours today and let’s stop the comparison on January 2008 when the Canadian Dollar was full speed ahead. The difference between 1986 and 2008 in the currency exchange is almost 30%. If you had changed your Canadian dollars in 1986 for US dollars and look back at their value on 2008, you would have lost. Then, let’s take a look at the same companies to see how they performed, just to be fair:
source: Ycharts
Here again, we are talking about the same results: thousands of percentage in returns vs a loss of 30%.
Just to make sure you don’t accuse me of using old data that doesn’t matter anymore, I checked when the most recent time when the CAD was trading at a low level. This was in March 2009, where the USD worth $1.27 CAD mainly due to the drop in oil prices and the hope of a stronger US economy. If you recall, this was also the month of the perfect entry point from the 2008 crisis. Once again, here’s how the currency and the stocks reacted:
source: Ycharts
We obviously don’t discuss thousands of percent over a short period of 7 years. However, it is interesting to see that the currency movement was nearly 10% (a gain for Canadian since the USD is now stronger than in 2009). Did you notice the weakest stock is up 65% (always consider to add the dividend) and the best performing stock is up 225%?
Overall, I did three comparison with three different contexts and different time frames. However, I always get to the same conclusion: US stocks outperform significantly the currency exchange movement in all cases.
So, back to our original question; are US stocks still worth it? the answer is yes.
Where to Start to Find Strong Dividend Growth Stocks?
I believe investing in the US market is a good idea. However, it doesn’t mean that any stock will do it. This is why it is even more important to be selective with the choice of your US stock considering that you may suffer a 20% loss over a short period of time (assuming oil goes up and pushes the CAD higher). A good free start is to register to my newsletter and download my Top 10 US dividend growth stocks.
If you are looking for more stock picks, you can also buy my Best 2016 Dividend Growth Stocks. You can get free a preview here.
Now, do you still think it is not the time to buy US stocks?
disclaimer: I own shares of KO, JNJ and MMM.
Thanks for the discussion Mike. The differential results between an investors national currency and the currency of the country they invest in can be remarkable. While there are some very expensive investment products that hedge out those currency risks, they are far too murky for me. I prefer to know what I own and pay close attention to it. I’ve been casually looking at Canadian investments lately, but am still gunshy of what appears to me to be a Canadian housing bubble. Time will tell
-Bryan
I’m with you on this one Bryan; I’m waiting for the Canadian housing bubble to burst since… 2012… I feel I sound like a broken records, but this situation just doesn’t make sense.
However, I was surprised to see how the currency difference over the long haul doesn’t matter much in one’s portfolio. Obviously, this make a remarkable difference if you look over 2-3 years, but over 10, 20 years? nothing worth a strong company, no matter what is the currency (CAD or USD).
Cheers,
Mike
Great analysis Mike. Very interesting to see everything in charts. If you constantly convert money from CAN to US and invest in US stocks, your results will probably be OK from time averaging affect.
Hello Tawcan,
this is a great technique to make sure you fully benefit from the currency situation (good or bad). However, even if you don’t do it and simply buy US stocks at the worst timing (right now for example), in 10 years from now, you will make a lot more money on those stocks regardless how much the currency worth (considering we can’t go in hyper inflation and see our CAD going down 90% of its value 😉 ).
Your article is biased towards capital gains and total returns which include reinvested dividends. I’m in it for the dividends and growing income. Capital gains are nice but I really don’t care about them so long as I get my growing income.
Lets say I buy a U.S. dividend stock when our $CAD is worth $0.70 and hold it to par ($1.00). For the purpose of simplifying this example lets also say the price remains flat and there are no dividend increases during the duration. If I spend my dividends rather than reinvest them not only will my U.S. stock be worth considerably less but, more importantly, I will be receiving about 43% less income. I can’t imagine very many dividend growth investors putting up with a dividend cut of 43% without selling the stock.
If you invest for 10 years or more (this is what dividend investors should do) and all your companies don’t increase their dividend and don’t see their stock price gain $0.01, you might as well buy CD’s. My point is that when you invest for the long haul, the currency impact doesn’t matter. If you take any of those “classic” dividend stocks I’ve picked and select any period, you will also notice that the dividend growth rate will largely compensate for your loss in currency exchange movement.
KO for examples double its dividend payment (100% dividend growth) every 7 years. Let’s take your example as your $CAD worth $0.70. On day one, you receive $1,000 USD from KO as a dividend payment. This equals to receiving $1,428. In 7 years from now, the CAD is now to par, but KO has doubled its dividend payment. Therefore, you receive $2,000 USD converted into $2,000 CAD. You are still a winner even if you bought KO in one of the worst timing for the currency exchange rate.
Keep in mind that a company that doesn’t increase its dividend every year should not even be considered if you are looking for income. Even if the company pays you 6% dividend yield, if you keep receiving the same dividend year after year, this payment worth less and less just because of the inflation. Therefore, picking high dividend yield stocks that doesn’t increase their payment leads to making less and less money year after year.
Thx for the comment!
Mike