Investing into companies which are paying dividends to their shareholders can be a good thing. Passive income by investing is my goal to become financially independent. The idea of not working but have an income is awesome. There are many reasons why somebody is looking for passive income. Some people want to have an extra income to their upcoming pension, some other people want to cover their expenses and some of them want more. That’s why people are interesting in words coming from Warren Buffett. He’s an idol for everyone. Being one of the richest people worldwide, no worries about the future but also a big responsibility. Nobody would say “No” to be the richest of the world.
But investing into companies worldwide is also causing problems. Especially for an european guy like me. Why? I would explain it with some words and thoughts. The main market for dividends is USA. Most of the companies are paying dividend quarterly, also they have mostly a long history of paying dividend. Look at the supermarket, the most of products are sold by american companies. I’m not saying that we don’t have them in Europe at all. But there aren’t a lot of them. Okay, we do have one of the biggest car producer, but we don’t have a lot of global players or market makers. We also have good companies, but the interest in shareholders is not that way how to deal like american companies. That’s some of the reasons why investors from europe are looking to be invested into american companies.
At the moment we do have a weak EURO and a strong USD. For an european investor its a mess. If I’m going to buy an american company on NYSE the exchange rate is around 1 EUR : 1,05 USD. That means for a $1000 investment I’m currently paying around 952€. One year ago I was paying 741€. This is a difference of 22%. If I bought shares for $1000 my investment would be 22% more worth than now, irrespective of the stock price now. There are some investors they have a +70% on their current stock holdings.
If I buy now share for $1000 and the USD is going up my Investment will be less worth, irrespective of the stock price development. When EURO starts to be weaker furthermore, I will win on my investment. As I will hold my shares life-time I want to look to dividend payments too. A dividend of $100 is 94€ today – one year ago $100 would be 74€.
The conclusion is that for me as a beginner the current time seems to be really bad. I don’t have any dividend now, and will not have a big amount very soon. So I’m currently investing and investing in this market is really risky. An investor which have a big account and is living from the account would be very happy about the weak EURO as he will earn more than last year. Of course, you can hedge the currency exchange by finance products (options/futures/cfd etc.) but these products are mostly not understandable for normal shareholders.
When you open a broker account within Germany (I guess its the same for the most of european brokers) the main currency will be EUR. It will be automatically exchanged to buy shares in other currency like USD, CAD or GBP. A exchange fee will also incur. Selling of a stock or receiving dividend will be re-exchanged in EUR again. So if you receive a steady dividend of $50 per month the payment could be 30€ or 40€ or 25€ etc. To avoid such things you could search a broker who is also dealing an account in other currency. My current broker is also providing an automatic exchange, but they are also providing an internal account for other currencies. But every investment is causing exchange fee that will decrease the yield.
Another problem for me as an european investor is the upcoming withholding tax. At all the most investors faced these problems when investing in “out of the country” companies. As I already mentioned we do not have a lot of companies, so I’m rely to invest outside from Germany. German companies are paying dividend too, and as I learned from the press Warren Buffett is also looking to be invested into european companies but it’s not that kind of historical. Only a few companies have dividend growth possibilities.
In Germany we are paying 26,4% tax on all capital income. It doesn’t matter if these are coming by investing, receiving dividends, receiving interest by accounts or trading. The first income of 801 € are free of tax, all above will be charged with 26,4%. Additional to this tax the most of countries have a withholding tax between 0% and 35%. For example the withholding tax in USA is 15% (30% without having a document which need to be sent). That means all Germans are paying minimum 41,4% tax ( or 56,4% tax) their dividend income from USA. If your expenses to cover are $25,000, then you need to receive $35,350 passive income. A yield of 5,0% means a portfolio of $707,000. Its not easy to become financially independent by knowing this issue.
Of course american investors will have same or nearly same problems when investing outside of USA companies, but I’m sure they will find enough opportunities to invest within USA.
What are your problems? Do you have similar experience?
Thanks for reading and take care!!!