Not too long ago I wrote about being invested in Telefonica as an experiment to see how much I will be tax as a international investor investing in US ADRs and how much taxes I will be levied with.
- There is a 30% withholding tax on dividends of US Stocks listed on US Stock Exchanges. Last I checked, there is not many ways you can bypass this.
- The withholding tax currently for Spain, where Telefonica is from is 19% as of this posting (Dec ‘10).This was raised from 15% in Jan 2010 if I am correct.
- We do not want a situation where our dividends are first taxed 19% at Spain and then 30% more in US before giving to us.
I invested 50 shares in Telefonica at a price of USD $61.23.
No of Shares: 50
Purchase price (USD): $61.23
Exchange rate then : 1:1.40 (Yes its terrible)
Total Cost (USD): $3061.00
Total Cost (SGD): $4285.00
Latest Half Yearly Dividend Declared (USD): $2.700750
Total Dividend (USD): 2.700750 x 50 = $135.0375
Total Dividend Received in DBS Vickers Account (USD): $108.38
Exchange rate now: 1:1.32
Total Dividend Received in DBS Vickers Account(SGD): $143
Total Withholding Tax Levied: 1-(108.38/135.0375) = 19.7%
Yield on Cost Based on US Cost before withholding tax: 2.70075/61.23 = 4.4%
Yield on Cost Based on US Cost: 108.38/3061.00 = 3.52%
Yield on Cost Based on SGD Cost: 143/4285 = 3.33%
So what can we drawn from this?
1. The only withholding tax you have to content with is the Spanish Government’s withholding tax of 19%
The dividend declared of USD 2.700750 that you see in google finance is before taxes. For US investors they need to deduct this 19%. For international investors like me in Singapore you need to deduct this 19% as well.
2. When investing in ADRs, different countries withholding tax matters in buying decision
What this means is that if you invest in a stock in Holland or in Brazil you are subjected to that government’s withholding tax rate.
It can be quite a hassle. Is it worth it?
3. Yield on Cost gets severely affected by withholding taxes
The yield on an annual basis was 8.8% for a stable growth stock. This gets cut to 7.04%. For Telefonica, 7% looks to be still respectable, but in theory the bigger your dividend yield the bigger your heartache.
For 20% withholding tax rate:
- 12% becomes 9.6%
- 8% becomes 6.4%
- 4% becomes 3.2%
- 2% becomes 1.6%
For 30% withholding tax rate:
- 12% becomes 8.4%
- 8% becomes 5.6%
- 4% becomes 2.8%
- 2% becomes 1.4%
4. Look for dividend stocks that grow increasing payouts
So if you are looking for dividends from US stocks and ADRs, my advice is that don’t make that your primarily target.
The opportunity cost of buying a US Dividend Stock is a Singapore one and at Investment Moats, on my Dividend Stock Tracker, the average yield is from 3.5% to 9% at the moment.[Check it out here >]
So why go international or US centric? One reason. For the past 10 years, you cannot find one Singapore stocks with good fundamentals that can increase its payout consistently.
They either end up at the same point or their payout goes up and down.
Around the world, we can find stocks with
- great fundamentals
- wide economic moats
- raise dividends for 20-50 years
Your yield can start from 2% but at a different growth rate your eventual yield on cost could be 15% by the time you require.
At the end of the day, we do not invest in dividend companies, we invest in business that
- grows against inflation
- generates solid cashflows
- innovative and proven track record (Macdonalds, INTEL, Abbott, Pepsi)
- up and coming dividend growers (Cisco, Total SA)
- at good valuation vs cashflow generation potential
I run a free Singapore Dividend Stock Tracker available for everyone’s perusal. It contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly here.