Investing in foreign dividend stocks is one way to diversify a
portfolio. It opens up a whole new area of commerce that can bring
excellent returns to an investor's pockets. However, as with any
investment, there are certain risks involved when buying foreign
dividend stocks. With a little due diligence, patience, and
practice any investor can utilize foreign dividend stocks to add to
their investment returns.
Sometimes investors get so caught up in the domestic stock
markets that they totally miss a wonderful opportunity to invest in
companies abroad. To some it might seem like a daunting task to put
money into an area that is so, for lack of a better term, foreign
to them. Though the United States stock markets are the largest in
the world, 50% of the world's stock market investing opportunities
are outside of the USA's borders. That means that by strictly
investing domestically an investor is missing half all trading and
investing potential in the world!
But you do not necessarily have to focus on foreign stock
exchanges to invest in foreign companies. American Depository
Receipts, or ADRs, allow foreign companies access to trade on the
NASDAQ, New York Stock Exchange, or another domestic stock market.
Investors are able to purchase shares in the form of American
Depository Shares, or ADS, in US currency. They are bought and sold
like regular shares and still pay dividends. It is an easier and
more familiar vehicle to get involved with foreign stock
Another way to get involved in foreign stock trading is actually
trading on a specific stock exchange, like the Tokyo Stock Exchange
or the London Stock Exchange. By investing abroad, it can limit the
potential losses brought about due to American instability. Many
investors are currently worried about the US market because of
economic troubles and mounting debt. Putting money in foreign and
emerging markets allows investors to diversify their portfolio and
hedge against economic troubles domestically and abroad.
There are also possibilities to see tremendous gains in emerging
markets across the globe. For example, if an investor were to have
invested in South Korea, Hong Kong, Singapore, and/or Taiwan (the
Four Asian Tigers) in the 1990′s, they could have seen gains in
markets that grew at higher than normal rates. While these are
unusual circumstances, there are always opportunities all over the
world for markets to experience higher growth rates than domestic
markets. It may take time and research, but the potential gains are
out there if an investor is willing to put in the work.
By the same token, however, dangers exist in foreign markets.
The Shanghai Composite Index, a Chinese benchmark, has fallen
nearly 16% from its highs over the past year. In contrast, the U.S.
benchmark S&P 500 currently sits right near its yearly highs.
Clearly, timing is essential.
So while foreign stocks do bring about a plethora of
opportunities, there are definite drawbacks to investing abroad.
Here are 5 potential concerns for foreign dividend stock
1. Tax Issues
An investor must be careful when investing in foreign stocks
because of certain tax implications. Many countries will tax
dividends paid out to foreign investors at a higher rate. So the 7%
dividend yield paid out by a company can actually be significantly
less if the country deducts a significant amount of withholding
taxes. However, some countries, like the UK, India, and
Argentina, do not tax dividends paid to US residents at all. This
fact is due to agreements between the U.S. and those countries to
not impose dividend taxes on each other.
Such cases are the exception, not the rule, however. Some of the
larger withholding tax rates by some countries on dividends paid to
U.S. residents are:
- Australia: 30%
- Brazil: 15%
- Canada: 15%
- Germany: 26.4%
- Mexico: 10%
- South Korea: 27.5%
Luckily, the IRS has a foreign tax credit that an investor can
use to deduct the taxes paid to the foreign government. This is in
place to help avoid double taxation of dividend income (i.e. the
IRS does not want to tax you on dividends that a foreign government
has already taxed you on). However, there is a limit to the amount
of foreign tax credit received. No one at Dividend.com is a tax
specialist, so the best thing an investor can do when faced with
tax issues is talk to an accountant.
2. Political, Economic, and Social Instability
While foreign investing can be used to hedge against potential
domestic economic issues, it can also be a drawback for the same
reasons abroad. Political, economic, and social instability might
occur in whatever country an investor might have money in.
Most of the time it is harder to get a pulse on the potential
instability a foreign country might face, which is why it is more
of a drawback than potential instability domestically. Things like
war, acts of terror, civilian unrest, or even natural disasters can
dramatically change the economic outlook for a given country, and
therefore the companies within its borders. New taxes might be
imposed on foreign dividend payments or the companies invested in
might be overtaken and nationalized by the country's government.
These factors all have an effect on the returns on investments and
must be taken into consideration when determining where investments
3. Dividend Payout Fluctuations and Unusual Schedules
Many times foreign dividend stocks have unusual dividends that
do not mirror the rigid monthly, quarterly, or annual payout
schedules that US investors are accustomed to. There are
sometimes no set payment amounts - for instance the past four
dividend payouts for Unilever (
) (a British and Dutch company) have been 29 cents, 32 cents, 30
cents, and 31 cents, respectively. So if an investor is counting on
regular income at regular intervals, more research will need to be
done to determine what stocks are right for the situation.
4. Regulatory Differences
Not every country has the amount of regulations and accounting
principles that are seen in the United States. Financial disclosure
and corporate governance vary greatly abroad. This fact can make it
difficult to properly analyze a foreign firm or economy to make
sure an investment is being made smartly.
For instance, there are many questions on the validity of
China's own financial statements and thus the companies within its
borders. It is hard to tell whether certain Chinese firms are
actually operating at a level that matches their financial
releases. The time and effort spent to properly analyze and find
financial information could be used in a more efficient manner
where return on time and investment is greater.
5. Lack of Liquidity
Not all countries have the highly developed market to
instantaneously trade securities at the click of a button like we
accustomed to with our stock exchanges. This factor can make it
difficult to trade in a quick convenient manner. If an investor
needed to sell and get out of a market, it might not happen as
quickly as one would like. Because of this, an investment timeline
and the level of liquidity desired must be considered by investors
so there are no surprises if a cash out is needed in a time
The Bottom Line
Foreign dividend stocks might not be for everyone. The
additional time and effort needed to research foreign companies
could be a hindrance for maximizing returns. However, for those
investors who have the time and patience to put in the work,
investing in foreign dividend stocks can be a great way
to diversify a portfolio and increase potential
return opportunities. Sometimes it pays off to expand horizons
and put in a little elbow grease to make the most out of
Be sure to visit our complete recommended list of the
Best Dividend Stocks
, as well as a detailed explanation of
our ratings system here