Adding international dividends to your passive income portfolio

We have discussed passive income portfolios many times in the past few months and dividend investing is certainly a major part of what we consider to be a great way to add passive income. Every month, we take a look at the top dividend stocks from the S&P500 and then do a further analysis in our free newsletter. We even tend to do some deeper analysis into a few of the promising names both on this blog and in the newsletter.

We have also discussed the benefits of adding international exposure to investment portfolios and the various ways of doing that. One interesting idea is to add US listed stocks that pay foreign dividends. Why?

-Greater diversification in the actual payout: Companies that pay a foreign dividend generally have an important part of their business outside of the United States and because of that they will generally help you get a better risk/return for your portfolio

-No conversion complications: In almost all cases, if you own a US listed stock in an account in $USD, the divideend will automatically be convered to $USD in your account even if it is paid in a foreign country.

-While the $USD is not doomed, it is fairly easy to make the case that there are many things to worry about (debt, emergence of China, high unemployment, etc) and having a cash flow in another currency might help increase your yield over time if the dollar continues to have a difficult time

-By buying US listed stocks, you avoid all of the tax implications of owning foreign stocks that would require withholding taxes, etc.

-Your broker will be taking a slight cut on the conversion of your dividend as usually happens for all conversions

-International companies sometimes have a less reliable dividend payout. Why? Because while companies in North America generally put a high value on paying a consistent dividend, many international companies try to pay oput as much as possible, making some years biggers and some others less so. Obviously, the dividend growth is not as consistent for these companies but it can still amount to superior growth overall and you could argue that a company that has such a pattern will have bigger incentives to perform than a company that pays a third or half of what it could.

Overall, I think it’s a winning proposition to add some quality foreign companies that are listed in the US, ideally that pay a dividend in a foreign currency. Over the next few days I will take some time to look at a few options, hopefully we’ll find some interesting ones.

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Adding international dividends to your passive income portfolio

We have discussed passive income portfolios many times in the past few months and dividend investing is certainly a major part of what we consider to be a great way to add passive income. Every month, we take a look at the top dividend stocks from the S&P500 and then do a further analysis in our free newsletter. We even tend to do some deeper analysis into a few of the promising names both on this blog and in the newsletter.

We have also discussed the benefits of adding international exposure to investment portfolios and the various ways of doing that. One interesting idea is to add US listed stocks that pay foreign dividends. Why?

-Greater diversification in the actual payout: Companies that pay a foreign dividend generally have an important part of their business outside of the United States and because of that they will generally help you get a better risk/return for your portfolio

-No conversion complications: In almost all cases, if you own a US listed stock in an account in $USD, the divideend will automatically be convered to $USD in your account even if it is paid in a foreign country.

-While the $USD is not doomed, it is fairly easy to make the case that there are many things to worry about (debt, emergence of China, high unemployment, etc) and having a cash flow in another currency might help increase your yield over time if the dollar continues to have a difficult time

-By buying US listed stocks, you avoid all of the tax implications of owning foreign stocks that would require withholding taxes, etc.

-Your broker will be taking a slight cut on the conversion of your dividend as usually happens for all conversions

-International companies sometimes have a less reliable dividend payout. Why? Because while companies in North America generally put a high value on paying a consistent dividend, many international companies try to pay oput as much as possible, making some years biggers and some others less so. Obviously, the dividend growth is not as consistent for these companies but it can still amount to superior growth overall and you could argue that a company that has such a pattern will have bigger incentives to perform than a company that pays a third or half of what it could.

Overall, I think it’s a winning proposition to add some quality foreign companies that are listed in the US, ideally that pay a dividend in a foreign currency. Over the next few days I will take some time to look at a few options, hopefully we’ll find some interesting ones.

If you liked this post, you can consider subscribing to our free newsletters here

View the original article here

Britain’s income taxes leaned relatively heavily on the rich before the 50p rate

Britain’s income taxes leaned relatively heavily on the rich before the 50p rate
Matthew Sinclair  •  2020 Tax Commission  •  Tuesday 22 March 2011

An interesting article by the Tax Foundation yesterday looked at how heavily different countries lean on those with higher incomes.  It cited OECD data from the mid-2000s (i.e. before the 50p rate) looking at the share of taxes coming from the richest decile (the richest ten per cent of the population).  That showed that the US took the most, at 45.1 per cent of all income taxes, and the UK was pretty high at 38.6 per cent.  However that could partly be explained by greater income inequality in the US in particular: rich people have a greater share of total income so they pay a greater share of total income taxes.  To correct for that they look at the ratio between the richest decile’s share of income taxes and their share of market income.  Again the US topped the table with the highest ratio at 1.35.  The UK also leaned relatively heavily on the rich though.

Ratio of share of taxes of richest decile to share of market income of richest decile, by country, mid-2000s

Of course, that graph is far from a complete picture.  There are consumption taxes too and they hit the poorest hardest.  It does show though that a steady pursuit of relatively low top marginal rates of income had yielded quite strong results in terms of getting the rich to pay a substantial share by the mid-2000s.  There is a real danger we are throwing that away at the moment.

Now we have the 50p rate which most independent forecasters expect is not raising any revenue.  That will mean the rest of us have to pay more.  New gestures are apparently being lined up as well like a private jet tax.  If that just amounts to adding air passenger duty to flights on private jets then it will probably be pretty irrelevant.  If it is more punitive, it will be yet another strike against the idea that Britain welcomes people who bring money and jobs to the country.  It will be another straw that breaks more camels’ backs and sends some limping off to Switzerland.

If we want to reduce the burden on ordinary families we need to stop trying to mislead them with those sorts of gestures.  Instead there are two critical steps.  First, stop the rapid growth in some items of spending – like International Development and the capital budget of the Department of Energy and Climate Change – and use the money to start lowering taxes. Scrap HS2 as an intolerable white elephant while resources are so scarce.  Go for more affordable options to get the capacity we need.  Then cut back on attempts to use the tax system to police behaviour.  Higher and higher taxes on smoking and drinking might satisfy nanny state enthusiasts but they hit the poor hardest.  That means they directly increase benefit dependency or poverty.

The biggest determinant of the fortunes of poor and middle income families will be the extent of economic growth, not how the resulting prosperity is carved up, so we need to do all we can to create the right conditions.  But to the extent those families are paying a larger share than they need to be, they are paying for political class shibboleths like sharp rises in international development spending and nannying taxes.  It isn’t because the rich aren’t paying their share.

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How many dividend stocks to own in your passive income portfolio?

It’s a common question and there is no way to answer it perfectly. Why? Because you could probably bring 10 different “experts” and they would all come up with different answers. There is no perfect answer but it’s a question that I get so often that I thought it’d be interesting to at least give my point of view. Let’s start with the basics.

-Having less stocks also means less trading fees
-The more companies you have in your portfolio, the more difficult it becomes to track them

-To smooth the passive income (adding companies makes dividend changes for one company less visible)
-To not depend on a specific sector or company too much (imagine having only a few financial companies during the most recent credit crunch)

So what does it become? It’s basically a balancing act where each person would have a different “middle point”. The number of stocks would generally depend on:

-Your ability to tolerate volatility
-The size of your passive income portfolio (for example, I have written about starting a dividend portfolio with $5000… do not spread such an amount over 10-15 stocks).
-The amount of time you want to spend researching these stocks
-The turnover you wish to have (are you a buy & hold or do you rotate often?)

It’s not necessarily set in stone, but here are my basic guidelines depending on the size of the portfolio:

Portfolio Size#Dividend stocks

As you can see, the number of stocks, at least for me, does not vary that much. Once I reach a passive income of $100,000 or so, I would generally keep the same number of stocks. Why? Because tracking and finding 25 winning dividend stocks is more than enough for me. It does give me comfort knowing that a 10% drop in any one of these stocks results in about a 0.4% loss for my portfolio which is very sustainable. I would from time to time change these 25 stocks obviously but trying to do too much reallocation can end up costing too much both in terms of trading costs but also the return. Why? Because chasing returns has always been shown as a losing strategy. You go with stocks that you believe in and that have strong fundamentals, not the stocks that have done the best in the past 12-24 months because those are very likely to not be the best performers in the next 12-24 months.

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