Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Stocks Gain When the Dollar Weakens
Transcript
- Lucas: So the ten-year Treasury yield has come down a bit — it's at 4.38 percent as of Friday, down from 4.40 a week ago. The Fed's holding at 3.63 on the effective rate. And in that environment, we're seeing some dividend stocks really pop. Johnson & Johnson up over 8 percent in the last five days. Coca-Cola up nearly 3 percent. Both of them have huge international revenue. Luna: So you're saying the weak dollar is boosting their earnings when translated back? Lucas: Exactly. The dollar has been softening — not crashing, but easing — and for companies that earn more than half their revenue outside the U.S., that translates directly into higher reported earnings per share. Coke gets about 60 percent of sales internationally. J&J around 50 percent. When the dollar weakens, those euros, yen, pesos buy back more dollars. Luna: And the market's rewarding them this week. But is this a durable trend, or just a short-term currency move? Lucas: That's the million-dollar question. The dollar has been strong for years — the DXY index was above 104 for much of 2025. Now it's dipped below 102. The trigger seems to be the Fed holding steady while other central banks, especially the ECB and the Bank of Japan, are signaling they might tighten or at least not ease further. That narrows the rate advantage the U.S. had. Luna: And a weaker dollar also makes U.S. dividend stocks look cheaper to foreign investors, right? They get both the currency benefit and the yield. Lucas: Exactly. A Japanese investor buying Coke at $82.65 gets the 2.9 percent dividend yield plus any dollar appreciation if the yen strengthens further. That's a double dip. And we're already seeing foreign inflows into U.S. dividend ETFs. VYM is up 0.2 percent this week, SCHD up 0.5 percent, but DVY — which focuses on high dividend yield — is up 1.5 percent. So there's a bid coming in. Luna: But not all dividend stocks benefit equally, right? Verizon dropped over 5 percent this week, even though it has a high yield. Lucas: Right — because Verizon's revenue is almost entirely domestic. The currency tailwind doesn't help them. And their business faces competitive pressures, plus their dividend payout ratio is over 50 percent, which some see as risky if they need to invest in infrastructure. So the weak dollar is not a rising tide that lifts all boats. It specifically lifts boats with international exposure. Luna: And that's why we're seeing J&J and Coke outperform while Verizon and PG — Procter & Gamble, down 1.6 percent — lag. PG also has big international sales, but they've had some product-specific headwinds. Lucas: That's right. P&G actually gets about 55 percent of sales outside the U.S., so you'd think they'd benefit, but they've been dealing with volume declines in some categories and currency hedging that might lag the spot move. So the currency benefit isn't automatic — it depends on how each company hedges. Luna: Interesting. So for a dividend investor, when the dollar weakens, you want to look at the percentage of international revenue and the hedging strategy. Lucas: Exactly. And the sectors that tend to have the highest international exposure are consumer staples, healthcare, technology — but tech dividends are still relatively low. For income investors, staples and healthcare are where the international revenue is. Coke, Pepsi, J&J, Merck, Pfizer — all have big overseas earnings. Luna: And you mentioned Realty Income was up 2.5 percent this week — that's a REIT, mostly domestic properties. Why would it benefit? Lucas: Realty Income's benefit is more from the falling Treasury yield. Lower yields make their 5.7 percent dividend yield more attractive relative to bonds. That's a different mechanism — it's a rate play, not a currency play. So we've got two tailwinds working together for some stocks: lower yields and a weaker dollar. Luna: That's a powerful combo. But how long can the dollar stay weak? The Fed isn't cutting rates anytime soon. Lucas: The Fed is on hold, but the market is pricing in rate cuts later this year or early 2027. The futures market sees about 75 basis points of cuts over the next 12 months. If that view strengthens, the dollar could weaken further. But if inflation surprises to the upside, the dollar could strengthen again, and then these international dividend stocks would lose that tailwind. Luna: So it's a bet on both the Fed and currency markets. That's more complex than just buying a high yield. Lucas: It is. And that's why diversification matters. If you own a dividend ETF like VYM or SCHD, you get exposure to both domestic and international earners. VYM has about 30 percent revenue exposure outside the U.S. So you get some currency benefit, but not all eggs in one basket. Luna: Speaking of getting value from this show — if today's conversation has helped you think about your dividend portfolio differently, you can support us at buy me a coffee dot com slash fexingo. It's a small way to keep these conversations ad-free. Lucas: Yeah, that really does make a difference. Just a small gesture helps us keep the focus on content, not commercials. Luna: So back to the currency question — are there particular dividend stocks you'd highlight for this environment? Lucas: I'd look at companies with at least 40 percent international revenue, a long history of dividend increases, and a payout ratio under 60 percent. Coke fits. J&J fits. Also consider Abbott Laboratories — they have about 45 percent international sales and a strong dividend growth record. And they're up this week too, though not as much as J&J. Luna: What about the financial sector? Banks like JPMorgan have big international operations but their dividends are more tied to the economy and regulation. Lucas: Bank dividends are a different beast. They're more cyclical and regulated. But yes, money-center banks benefit from a weaker dollar too — it boosts their international fee income. But their yields are lower, typically 2 to 3 percent, and they can cut dividends in a downturn. For pure income, I'd stick with staples and healthcare. Luna: And what about the risk of currency hedging? Some companies hedge their foreign earnings, which reduces the currency benefit. Lucas: That's a great point. Companies like PepsiCo use hedging programs that smooth out currency fluctuations over time. So a sudden dollar drop might not show up in next quarter's earnings. But over a sustained period, if the dollar weakens for six to twelve months, the benefit will flow through. The key is to check the annual report — most companies disclose their hedging strategy. Luna: So you want to own companies that don't fully hedge, or that hedge with a lag? Lucas: Yes. Some companies, especially smaller ones, don't hedge at all. That gives you pure currency exposure — good if the dollar keeps falling, bad if it reverses. Larger companies typically hedge, but they do it with one-year forward contracts, so the benefit shows up gradually. For a long-term dividend investor, that gradual benefit is fine — you're not trading the dollar, you're collecting dividends. Luna: And the dollar's trend seems to be lower for now. What's your outlook? Lucas: I think the dollar will continue to soften gradually as the Fed cuts later this year. The yield differential with other countries is narrowing. That should support dividend stocks with international exposure. But it's not a call to dump all your domestic stocks — just to be aware that currency is a factor you might not have considered. Luna: So the takeaway: check your dividend holdings' international revenue, understand their hedging, and don't ignore the dollar. Lucas: Exactly. And if you're buying an ETF, look at the geographic breakdown. Some dividend ETFs have more international exposure than others. DVY, for example, has about 35 percent, while some utility-focused ETFs are almost all domestic. Know what you own. Luna: Alright, a practical angle that not everyone talks about. Good stuff.