What are the problems from an european investor?

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.

Currency exchange

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.

Account Management

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.

Withholding tax

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!!!

Comments

  1. ABigBlueWorldCitizen says

    Hello,
    My problem, or better, our problem is that we started too late for getting the big recovery wave ç_ç

    However, for the exchange rate I’m crossing it off investing in Italy (easy high/secure yield) and Germany(more speculative), so I use EUR till the exchange rate will turn again in my favor (as someone in your country would like).

    However, why will you invest only in USD? Shouldn’t be better to invest in different value to suffer less the currency swing?

    • says

      Hi,
      thanks for your message!

      I’m not very concentrated on USD stocks only. But the most market leaders are located in US or coming from over there.

      Frankly speaking, I don’t have any idea of italian stocks or companies. What would be your suggestion for italian stocks?

      Rgds,
      Patrick

  2. There's Value says

    I just wrote about this very problem about 5 days ago, see here: http://theresvalue.co.uk/should-i-invest-in-european-stocks/

    I am also sticking to my own currency (GB £) due to the high US $ at the moment. I was considering buying some € stocks, but I am loathe to buy them due to the WHT. Why should I pay that, when there are plenty of opportunities in my home country, upon which I will not have to pay any extra tax?

    Well, clearly I am going to stick with British stocks for the time being.

    By the way, what is the WHT on British stocks owned by Germans?

    Frohe Ostern!

    • says

      TV,
      you’re totally right. I’m just asking myself, but as mentioned I think the opportunities are really rare. It’s the view on it. If I want to invest to receive the best yield, then may be there are more opportunities. But if I want to buy the most of market leaders, then I should take a look overseas. The market in Germany the most companies are paying dividend, correctly. But often they don’t grow their dividend from year to year. Dividends will remain the same or decrease. I see that for most of european companies. I also see some companies in GB stronger than in Germany.

      The WHT on British stocks is 0%. I’m still working on a watch list with european stocks, so I could be invested in few european stocks very soon. As a beginner like me its a jungle – jungle of many opportunities. Looking forward to walk through 🙂 At the moment I’m like a child – discovering the whole world.

      Thanks. Happy Eastern too!

  3. says

    Patrick,

    You touch upon some good points, but I don’t agree with all of them.

    First, you mention that the main market for dividends is the USA. While the USA definitely has the most dividend growth companies, there’s a solid basis of European companies maintaining and increasing their dividends over time. I even made a list available on my blog and I believe it currently sits at about 60, almost all of them large caps. Many of the products in our super market are furthermore European: Unilever and Nestlé are only two good examples of consumer goods giants.

    Second, the currency exchange rate currently is a bummer for sure. That’s why I’m holding off on investing any further in the American market, but only because there are more than enough good European opportunities. Over the long-run the exchange rate doesn’t matter all too much, because it averages out. I wrote a post on this and many other DGI seemed to agree with this statement. So if you see a good US opportunity, go for it!

    Third, account management is no hassle for me, although this can obviously differ from broker to broker. I can open EUR, USD, CAD, GBP, CHF accounts without additional costs and there are no exchange rate fees whatsoever. Maybe shop around for another brokerage?

    Fourth, I agree that the withholding taxes (both in your own country and abroad) reduce our income and growth potential significantly, but it’s not too much of a problem to overcome. If a company provides a decent net yield, I don’t care how much is lost beforehand to taxes because it remains a good investment nonetheless. If you still worry about the taxes, maybe look for an ETF domiciled in Ireland?

    Best of luck on your own DGI journey! I’ll be following along.

    Cheers,
    NMW

    • says

      NMW,

      i really appreciate your comment. I’m really glad to read from your side and of course your point of view as a “neighbor”.

      Due to background, every investor has another view on it. I checked your list few weeks ago. Its really helpful for everyone, but I don’t see a lot of companies which are primary market leaders and secondly have a long long dividend history. As a long-time investor I want to see an acceptable yield and the growth. Also I’m looking for the industry. It must be a mixture of all, and of course there should be also European Stocks inside. I’m not saying that in Europe there’s nothing to be invested. But the opportunities are less than in US. But of course we do have some. It would be bad if not. I guess that’s fact. You mentioned Unilever/Nestle for example. Unilever: I fully agree and they are already on my watchlist. Nestle: Here it’s the same as Investing in US stocks due to the CHF currency.

      In general everyone has an own background (knowledge, capital, saving etc.) and a goal – I don’t think there is “that one way”. Some of them don’t want to be invested in Financials, some of them don’t want to be invested in Healthcare. Some of them are looking for high yield, another for the growth. Then everybody has other brokerage – different costs etc. If you invest 5000€ per purchase it doesn’t matter if brokerage is 10€ or 5€ or 1€. With my start by investing every EURO I have/save it makes a big difference.

      I only want to show what is possible. Keep in mind I started with 0,00 € beginning of this year. DGI is a solid strategy and obviously I could start to trade and my account would be nearly 5000,00 € or 10000,00 € now or 0,00 € again. Let’s see what happens – I’m afraid of the Greece crises, the interest market nearly 0.00%, Problems of Ukraine etc.

      Anyway, thanks again for your comment. I’m learning from day to day more and more.

      Thanks for stopping by!

      Cheers Patrick

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