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Given there's a 30% dividend withholding tax, could it still make sense to buy US stocks for the dividend?

Given US dividend-paying companies usually have a longer track record of dividend payments and dividend growth, as well as stock price appreciation, some with high enough yields may still seem attractive for their dividends despite the 30% cut for uncle sam. For example, just looking at dividends and ignoring for now all other financials:

MO

  • Current yield: 7.5%
  • Effective yield (-30%): 5.25%
  • Consecutive years of dividend growth: 52
  • Consecutive years of dividend payments: 52
  • Dividend growth rate for the past 5 years: 8.42%

ABBV

  • Current yield: 4.17%
  • Effective yield (-30%): 2.92%
  • Consecutive years of dividend growth: 8
  • Consecutive years of dividend payments: 8
  • Dividend growth rate for the past 5 years: 17.93%

3M

  • Current yield: 3.33%
  • Effective yield (-30%): 2.33%
  • Consecutive years of dividend growth: 63
  • Consecutive years of dividend payments: 63
  • Dividend growth rate for the past 5 years: 5.92%

GIS

  • Current yield: 3.03%
  • Effective yield (-30%): 2.12%
  • Consecutive years of dividend growth: 2
  • Consecutive years of dividend payments: 32
  • Dividend growth rate for the past 5 years: 1.86%

MCD

  • Current yield: 2.06%
  • Effective yield (-30%): 1.44%
  • Consecutive years of dividend growth: 45
  • Consecutive years of dividend payments: 45
  • Dividend growth rate for the past 5 years: 7.78%

Am I crazy for considering a 30% cut to be acceptable? Or should I focus more on finding dividend stocks that yield more than 2.5% in other countries, even if they don't have such a strong track record? Any other non-US dividend investors picking US stocks?

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  • Knowing the country of tax residence would be helpful.
    – base64
    Jan 5, 2022 at 11:58
  • Singapore tax resident
    – Snowman
    Jan 7, 2022 at 14:38

2 Answers 2

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It makes no sense to invest in a stock solely because it pays a dividend.

Dividends do not provide total return. Only share price appreciation does so. Though taxed as income, dividends are not income.

You should be investing in high quality companies that are leaders in their sector with strong, growing free cash flow, low debt, and good management. If they pay a dividend, fine. If not, no big deal.

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  • I agree about investing in high quality companies that are leaders in their sector with strong, growing free cash flow, low debt, and good management. Dividends are however included in total return, and companies that pay dividends often grow their dividends over the long term, so a company with both share price appreciation and dividend growth is more attractive to me as an investor seeking stable, long-term, and growing income.
    – Snowman
    Jan 6, 2022 at 15:46
  • Dividends are income. If you hold shares and continue to receive dividends for holding those shares, you are receiving income. And dividends are not always taxed as income - it depends where you are tax resident.
    – Snowman
    Jan 6, 2022 at 15:48
  • At some point you're going to have a light bulb moment and realize that dividends contribute ZERO total return. Only share price appreciation creates total return. Here's a bombastic presentation that explains it. Or if you wish, go to the Vanguard web site (or many others) and read about it.
    – Bob Baerker
    Jan 6, 2022 at 23:14
  • That's literally the dumbest youtube video I've ever seen. Seriously, look beyond Youtube for your financial education. 1) yes, the company is less valuable after the dividend pay date (not the ex-dividend date) so on paper you have zero net gain as a shareholder. Over the longterm though, you continue to accumulate more dividends even without buying more stock, such that after years or decades, even with zero or negative stock price appreciation, you can still be net positive on your investment.
    – Snowman
    Jan 7, 2022 at 15:07
  • 2) he's assuming, as is quite common, that everyone is American and/or pays capital gains or income taxes on dividends received, which is simply not the case. I pay zero taxes on dividends paid to me. I get total return from both increasing dividend income and stock price appreciation.
    – Snowman
    Jan 7, 2022 at 15:09
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It's not crazy to invest in the US - any non-US investors buying a 'global' fund are paying a withholding tax on US dividends within that fund.

This article discusses reducing the tax to 15% by personally claiming your country's tax treaty or by investing in an ETF that can claim a tax treaty.

For individual high-yield stocks, if you believe the US stocks are extremely mispriced, it could be justified to buy despite the withholding. Otherwise, consider a non-US equivalent, e.g. British American Tobacco rather than Altria.

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  • Thanks! My country doesn't have a tax treaty, and I've considered Irish-domiciled ETFs but feel less inclined due to overdiversification, high valuations, management fees, all for similar effective yields, e.g. HDLV 2.82% UEDV 2.43% QDIV 2.03% UDVD 2.38%
    – Snowman
    Jan 5, 2022 at 10:06

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