Next month could deliver a shock to the system if the US Federal Reserve really does hike interest rates for the first time in nearly a decade.
The last time the Fed actually lifted rates was in June 2006, so for many newbie investors this will be unknown territory. It may knock markets off course (as it did last time) but there will be some positives for UK investors. High interest rates mean a stronger dollar, especially if the Fed hikes rates twice this year, as many expect.
This is good news for Britain’s with shares in FTSE 100 companies that pay their dividends in dollars, whose income will look even more attractive when converted into relatively weak sterling. The last 12 months have already been good news for dollar dividends, with the pound falling to $1.55 today, against $1.66 one year ago, a drop of 6.6%. Now there could be more to come.
Here are three companies that should benefit.
AstraZeneca
Pharmaceutical giant AstraZeneca (LSE: AZN) currently yields 4.20% and the money hits your bank account in dollars, which means it could look even juicier next month.
The stock has had a tough time lately, however, falling 6.8% in the last six months, worse than the 5% drop in the FTSE 100. Q2 core operating profits fell 4% to £3.62 bn, as management focuses on investing heavily in its drugs pipeline. Things could get tougher with treatments Crestor and Nexium both coming off patent in the next couple of years, as they accounted for a third of group sales last year.
AZN’s future will largely depend on whether chief executive Pascal Soriot is right to put his faith in the company’s new generation of blockbuster cancer drugs, which he hopes will deliver $45bn-plus revenues by 2023. But it is nice to see a FTSE 100 company investing hard for the future, given so much short-termism elsewhere. And you get a dollar-driven dividend while you wait.
BHP Billiton
Investors in troubled mining giant BHP Billiton (LSE: BLT) need some good news, with the stock down almost 40% in the last year on falling demand from China. Personally, I think China will get worse before things get better, although there are signs that the authorities’ latest stimulus this package will keep the growth story rattling along for a few years more.
What is bad news for BHP Billiton’s share price is good news for income investors, with the stock now yielding 6.39%. A stronger dollar would give a further real-terms boost to UK investors.
BHP Billiton is now dividend dynamite, although unless they are reversed, falling metals prices (iron ore now trades at $56 a tonne against $140 in January last year) must eventually force management to cut the payout. The board remains committed to the dividend from now, but expect rumblings ahead.
Unilever
Household goods giant Unilever (LSE: ULVR) is much admired by investors but its success has a downside: it has historically traded at more than 20 times earnings and yields as low as 2.5%.
Recent share price slippage has improved both figures, with the price/earnings ratio at a relatively (for Unilever) affordable 17 times, and the yield at 3.22%. A dollar surge could make that yield a little more rewarding.
Many investors backed Unilever as a safe way to play China and emerging markets, and sales from this source are still growing at around 6.5%, although the days of double-digit growth are over. Worryingly, European sales are falling.
But Unilever has delivered the goods from more than 20 years and at today’s price long-term investors should still clean up.