Traders have heavily favoured the US dollar ($USD) over the Great British pound (£GBP), pushing the £GBP to a 30-year low. The $USD features in 85% of all global trade. This demand makes it a haven during market uncertainty. This may sound like something for me to fear as an investor in UK equities. Yet, here’s how it might be an opportunity for me to generate a solid passive income going forward.
Which companies benefit from a strong dollar?
Several FTSE shares earn large portions of revenue in $USD. Furthermore, when dividends are paid out in $USD, they are worth more to investors when they are inevitably converted back to £GBP. This could boost such dividends by 10-20%.
However, if a company’s main manufacturing operations are outside the US, for example, then the currency markets will work against them. So, here are my top two picks for capitalising on potentially boosted dividends.
Dividend growth potential
The share price of 4imprint Group (LSE:FOUR) is up almost 20% year to date.
As I write, 4imprint’s payout ratio is low. This means earnings are easily covering investors’ dividends. Interim earnings this year for the supplier of custom promotional merchandise grew to almost $1bn. Profit margins grew too, and analysts expect earnings per share to grow by 27% over the next two years.
Over 90% of 4imprint’s revenue comes from the US. Also, a large portion of its manufacturing occurs in the US, with blank products being purchased from Chinese suppliers.
So, it seems most of the group’s transactions will benefit from a stronger dollar, especially £GBP dividend payments. The dividend yield currently stands at around 2%.
I think this has the potential for significant growth going forward, which is why I will be buying these FTSE shares for my portfolio in the coming days.
However, demand for marketing and promotional products does decrease during times of economic hardship. This could impact 4imprint’s revenue if its services aren’t deemed essential.
A dividend legend with big stakes in the US dollar
The current dividend yield for GSK (LSE:GSK) is much higher, at over 7%, and has a very reliable track record. Since 2015, the company have almost always exceeded an annual dividend yield of 5% for its investors.
Earnings grew by 16% for the pharmaceutical giant over the past year, and analysts predict them to grow by around 10% next year. GSK is one of the biggest players in the FTSE 100 and has very diversified international operations. Over one-third of its revenue is $USD.
Ahead of its Q3 results, GSK expects a 10% tailwind to its revenues. Earnings per share over the period are expected to increase by 12% from these favourable currency fluctuations.
However, the company does have a high ratio of debt to equity, which isn’t favourable in a climate where interest rates are surging.
Still, the high and reliable dividend yield is hard to resist especially with currency tailwinds. I’ll be keeping an eye on the GSK share price as a result, with a view to adding it to my portfolio in the near term.
