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By Josh Peters, CFA | 01-07-2015 01:00 PM

What Impact Will a Rising Dollar Have on Dividend Payers?

More than likely, it will mean smaller-than-usual dividend increases from companies with global footprints, says Morningstar's Josh Peters.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. What impact will a rising dollar have dividend-paying stocks? I'm here today with Josh Peters--he is the editor of Morningstar DividendInvestor newsletter and also our director of equity-income strategy--to look at this question.

Josh, thanks for joining me.

Josh Peters: Good to be here, Jeremy.

Glaser: So, let's start with what's driving the dollar higher. What are some of the factors that are [causing the] rise against the euro, the yen, and other currencies?

Peters: Well, it's a tribute to American economic strength right now. We've really broken out of the pack and suddenly are having a much stronger economic recovery. Really since mid-2009, we were ploughing along at a low 2% GDP growth rate, and now that's picked up quite a bit relative to the rest of the world, which frankly isn't doing so well. Emerging economies have slowed down; there is more uncertainty; Europe remains moribund--on the verge of a deflationary recession. And with that, you would expect that capital would look to go places where it's going to find more economic growth, and that's the United States.

Then, you've also got very, very low interest rates. We think of them as being very low here; they are even lower in Europe. Lately, you can go out to five years in German bonds and the interest rates are negative. A 10-year government bond--government of Germany--is about 0.5 percentage points. To a German investor, a 10-year Treasury here that we think of as really expensive at a 2% yield actually looks really good. So, that's continuing to attract more capital. And as people want to exchange other currencies for the U.S. [currency] so that they can invest in our securities and our economy, that's driving the price of the dollar up.

So, I think we can take it as a compliment as Americans--give ourselves a little pat on the back. But this isn't really good news for most investors because so many of our large companies have overseas operations.

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