It is common for a foreign company wishing to make their stock available in the U.S. to have ADRs/ADS available. American Depository Receipt (ADR) becomes the way to for U.S. investors to own shares in the foreign company. Holding stock of foreign (i.e., non-U.S.) companies means that a fee is deducted from dividends received for the cost of the ADR/ADS plan.
In addition, or however, many foreign governments withhold taxes from dividends before they are distributed to shareholders.
These taxes can be mitigated in some circumstances, but not always.
If the stock is held in a retail (namely, non-retirement) account, then the taxes paid to the foreign government can be used to reduce our own (U.S.) taxes to the IRS. This is called “foreign tax credit.”
However, if the stock is held in a retirement account, then the withheld tax cannot be used as a “foreign tax credit.” While some countries have a tax agreement with the U.S. that can reduce or eliminate withheld tax, most do not.
As a result, these taxes reduce one’s returns. Let’s take an example.
Norway taxes dividends at 25%. Equinor (EQNR), formerly Statoil, just paid a dividend of US $0.35 per share. By withholding 25%, dividend payment is reduced by $0.0875 to $0.2625 per share. As a result, yield effectively dropped from 4.8% to 3.6%. Since Equinor pays a variable dividend (dividend varies every payment), it is a guess what the next payment will be, and a guess what the annual total might end up as, muddying calculations.
So Is It Worth It?
That’s a toss up. There is no right answer. On the face, losing 25% is not optimum.
But there are some way to consider it appropriate to hold some of these kinds of foreign stocks.
There is diversification: foreign stocks are a “non-correlated asset”, namely subject to different influences than U.S. stocks. Then there is the possibility that despite the foreign taxation, the deferred U.S. taxation of retirement accounts allows for a larger longer term appreciation. And in general, foreign stocks do, on average, pay higher dividends than U.S. stocks.
There is the matter of having enough assets to fund purchases. Sometimes a person has more available funds in a retirement account than funds at the retail level.
Do you hold foreign stocks in retirement accounts where dividend taxes are withheld? Let me know here.
Looks like the Guava plant will have fruit again this year.
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