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How Foreign Exchange Can Influence Dividend Payments

Over the past month, shares of Algonquin Power & Utilities Corp. (TSX:AQN)(NYSE:AQN) have declined by approximately 7%. Shares reached a high of $14.35 over the past few months but experienced a pullback which coincided with the appreciation of the Canadian dollar (CAD) in comparison to the U.S. dollar (USD).

For investors trying to figure out the ramifications of this currency change, let’s take a look.

Currently priced in CAD, shares of Algonquin pay quarterly dividends which are fixed in USD and then are converted by the brokerage firm once received. It is important to remember that a stronger CAD is good for Canadians wishing to purchase USD. On the flip side, investors holding USD will receive less CAD as the CAD increases in value. For the dividends which are received in USD and then converted into CAD for Canadian investors, the dividends and the yield become less attractive as the CAD increases.

At a price of $13 per share and quarterly dividends of US$0.1165, the yield would be approximately 4.8% at a conversion rate of CAD$1.35 per US$1. Given that the Canadian currency has gained in strength as interest rates have increased, the current yield, which assumes an exchange rate of 1.25 (instead of 1.35) has dropped to 4.5%. At this lower exchange rate, we continue to assume that the stock is priced at $13 per share.

Instead of holding the share price constant, however, we have the advantage of hindsight. When shares hit the high price of $14.35 on June 6, 2017, the exchange rate was approximately 1.35. Given these numbers, the approximate net yield for investors purchasing shares in CAD at that time was 4.4%. Again, the current yield, assuming a $13 price tag and a conversion rate of 1.25, is 4.5%. Investors are clearly getting a better deal at a price of $13 per share instead of the higher $14.35.

Although investors have a lot more to consider than the dividend yield, it is still very interesting to see how the share price has reacted to a change in the dividend yield. As a defensive security, the company is very often sought out for income instead of capital appreciation. Historically speaking, however, the total returns from Algonquin have come from both dividends and price appreciation.

Over the past five years, investors have received much more than the approximate 4.5% dividend yield. Shares have increase in value by a total of approximately 102%, which equates to an average annual return of 19.2%. Patient investors have been handsomely rewarded in spite of a short-term pullback.

When investors consider investing in this security (just as with any other), it is important to have proper expectations. Those wanting to double their money in less than one year will have a very difficult time doing so with any defensive name. Instead, it is highly likely that over a long investment period, investors will be fairly rewarded regardless of the foreign exchange fluctuations.

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Fool contributor Ryan Goldsman owns shares of Algonquin Power & Utilities Corp.

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