Dividend Investing So Far

The real skinny

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We wrote about dividend investing a long time ago. We wrote a longer and more detailed article earlier this year. And still we got a question this week pointing out that I have never really gone into my own experience with dividend investing.

​This post will redress this terrible wrong.

You can see a lot of what I am doing in the annual progress reports.

My wife and I have three separate portfolios. My main portfolio, which is in various index funds; my play portfolio, which is mainly dividend paying shares (and a couple of random purchases I regret); and my wife’s portfolio, which is also in various index funds.

I believe investing in diversified, low-cost index funds is probably the best option for most people (including me). At the moment the easiest way to do that in Japan is to use mutual funds. This is not only likely to be more successful over time, it is also a lot less work than trying to be clever with a more active approach. This is why almost all of our money is invested this way.

However, I personally quite like the idea of dividend growth investing.

For me, there are several attractive aspects of this approach:

  • being able to live off the dividends without having to touch the principal
  • having dividends increase faster than inflation
  • being able to see your ‘income’ grow in real time
  • being able to ignore stock price moves

However, there are also drawbacks:

  • you may underperform an ‘all-market’ index portfolio
  • by buying single stocks you run the risk of large or total losses
  • dividends may be cut or eliminated
  • need to do research and follow companies

So how has it worked out for me? Well, I went through several phases.

Phase 1: the greedy phase

At the start I looked for and bought companies that paid a large dividend. This didn’t work out too well as I wasn’t looking at the full picture. One of the worst performers was Santander, which is currently down almost 50% and to add insult to injury also cut the dividend. An overly large dividend can be a sign of some kind of problem with the company.

Phase 2: the miserly phase

In this phase I looked for cheap Japanese companies that paid a large dividend but also had somewhat healthy finances (earnings per share larger than the dividend, etc.). This worked out extremely well, but only because I was lucky with the timing (the Bank of Japan pumped up the domestic stock market). We wrote about one of the success stories here. I figured the situation was going to change so decided to keep my gains and move on.

Phase 3: the balanced phase

Now I am looking for companies that pay a modest dividend, have healthy finances and a solid business, and seem likely to increase their dividends in the future. Things like Disney, Apple, Target, BP. Looking at my portfolio, I seem to have a lot of energy companies. I’ll have to diversify a bit more.

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My tax-reporting account holdings. These dividends are taxed 10% at source by the US, then 20% by Japan. Half of the Japanese taxes can be claimed back to avoid double taxation.

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My NISA dividend shares. The dividends are taxed at 10% by the US and not taxed by Japan.

So how have I done? Well, I think in terms of total value we have definitely lagged the index. I would be better off having bought world equity funds with the money instead.

However, it is nice to see the dividends mounting up. So far, I have received the following dividends (after tax):

2013: 44,304 yen
2014: 203,521 yen
2015: 211,193 yen
2016: 251,911 yen
2017: 297,229 yen

This year looks on track to be an increase too. At the moment I am just reinvesting the dividends, but if I stop working or reduce my income I have the option to spend the dividends instead. The main attraction is not having to think about selling in order to realise gains. Eventually I would like this to supplement my pension as a source of passive income.

And of course don’t forget that most of our investments are in index funds. Still, the dividend portfolio is interesting and motivating, and I’m happy to carry on building it going forward.

How about you? Any experience with dividend stocks?

23 Responses

  1. As you point out, non-US people who hold US shares have 10% withheld, and then when filing here you can claim that against your tax bite. I’d only note that, as a US person, there is no withholding, but there is then also the full 20% due here. So kind of a wash.
    I have one ADR (RDSA), and 20% is withheld, and i think it’s that same percentage if I held something Canadian (e.g., ENB, POT, one of the banks). How about Santander–is 20% of the dividend withheld for Spanish/EU taxes? (and, sorry to say, SAN looks kind of attractive now)

  2. Hi,
    Just wondering – In general, your index funds are sitting inside your Nisa, while your high dividend funds are sitting outside taking the 20% tax hit?

      1. All right. So the shares sitting in your NISA then take the 10% withholding tax hit? I’m thinking of adding some high dividend share to my Nisa, but am trying to still get my head around it. There is not much domestic that pays out in a similar volume I am guessing…

      2. Indeed. There are domestic dividend paying shares, but of course it’s easier to do the research in English 🙂
        I also have some Japanese dividend stocks, but in my tax-reporting account, not NISA.

      3. Apropos of Derekh’s question about Japanese stocks with high dividends (if I understand it correctly) there are some sectors known for high dividends. The trading houses (Itochu (8001), Marubeni (8002), Mitsui Bussan (8031), Sumitomo (8053), Mitsubishi (8058)) tend to have low P/E ratios and pay relatively high dividends. The same is true for telecoms KDDI (9433), NTT (9432) and Docomo (9437). I like having these in my kids’ JuniorNISA accounts.

  4. Thanks for addressing my question (Re: your success with dividends) in such detail , Ben. I have modest investments in Apple and receive a small dividend from them. My S & P 500 index fund (purchased on NISA and available on the Tokyo stock exchange, so no 10 percent US holding tax), pays out a modest dividend. Like you, my primary investments are in index funds.

    1. Glad to be of service, Chris! Actually, ideas for blog posts are always welcome 🙂
      BTW, I think your S&P500 index fund will probably have the withholding tax taken out of the individual dividends of the companies at source, which I guess means you can’t claim it back?
      Does anyone know how that works?

  5. I’ve also been a big fan of dividend investing but I use my Japanese accounts for Japanese stocks and US accounts for US (and a few European) stocks. I’ve also learned that index funds are a more reliable choice than relying on my stock picking skills so that is where I put most new money. US investors like me pay 23.8% tax on passive income (thanks to the tax increase from the Affordable Care Act) and then turn around and pay the Japanese 20.315% minus 10% (net 10.315%) so the total tax is around 34%. For that reason I now favor stocks and funds with lower dividends when the position is not in a NISA account.

    1. Interesting. Can you not offset the US tax against the Japanese tax to get rid of it completely?

      1. It’s a little hard to estimate the US tax liability in advance because of the Alternative Minimum Tax but the overall effect is that I pay a 30%+ tax on dividends and long-term capital gains. In fact, when I work on my US tax return online using a program that shows my tax liability for each entry, there is almost no change between before and after I enter the Japanese tax I’ve paid for a US dividend. If I take those capital gains during retirement I can get that tax down a bit because I’ll be in a lower income tax bracket and maybe not be in Japan.

      2. “US investors like me pay 23.8% tax on passive income (thanks to the tax increase from the Affordable Care Act)…”
        Uh, I’m US and haven’t paid much of anything–only when I’ve sold something for considerable gains.
        Definitely NOT 23.8% on everything…!
        I use turbotax, and the ACA is definitely something that it doesn’t do correctly–as an expat, esp. if you’ve been away a while, there’s no way that you should be paying tax with that somehow being an included factor.
        It’s dinnertime, and I’ll try to get back to this later after a look at my returns. Generally, the only tax I pay on ~$12-15k of dividends is to Japan. Zero to the US.
        >> I’m assuming you’re claiming the FEIE, and not the foreign tax credit. Also, if your income is over the ~$103,000 FEIE (mine’s not), that may be a factor.

  6. Captainspoke, thank you for the response. I would love to be wrong on this so I will be grateful for your follow-up, but my US taxes get done twice, once by me online using TaxAct and then once by my Enrolled Agent (because the IRS keeps asking for evidence that my Japanese income taxes are really this high). My income is above the FEIE limit but because my marginal rate of 55% in Japan is well above the US rate, the salary just puts me in a bracket where passive income is hit by both the 3.8% ACA and AMT limits the deductibility of foreign taxes. In addition to earned income, for 2017 I had $132K in dividends (US & Japan) and $139K from converting a Traditional to Roth IRA. My US tax bill was a little under $46K. I’m not paying an ACA penalty for no insurance (being in the Japanese health insurance system covers us for that obligation). The 3.8% from Form 8960 which applies above when modified AGI (after subtracting FEIE) is over $250K and it applies to passive income from everywhere so it also penalizes me for Japanese dividends. Again, any counter-advice you can offer is welcome! (I agree with you that tax software doesn’t work well, especially for us expats.)

    1. TW: It looks like we’re in completely different leagues…! And I’m in no position to offer advice. Given our different situations, and the fact that your return is being checked directly by an enrolled agent, there’s not much I can offer. You have probably already considered a CPA on the side, as a coach or second set of eyes for the US side, and I’d guess you’ve also considered ways to minimize your dividends & distributions.
      Japan has been good to me and my family, and there are many things about it that (on a societal level) I view very positively. As such I’m willing to pay whatever I may owe. From my POV, your situation is enviable (even with the tax bite), and I hope that you’re doing something that you enjoy.

      1. Captainspoke, I think the main thing that makes our positions different is that I have been here a long time. I’m also enjoying it and it’s the satisfaction I get in my career and daily life that helps me tolerate the tax madness when you fall under both US and Japan’s tax regimes. Thanks again for the thoughtful comments.

  8. Dividend investing is not necessarily a bad option in some cases – particularly retired and/or are looking to generate some cash flow without selling off shares.
    For most people, however, it’s not a great option. There’s usually a reason a stock is paying a dividend yield above the general market-wide interest rate level – they’re not great stocks (ie, they’re overpriced).
    Second, you’re getting taxed on dividend income – if you’re working age that dividend income is going to get taxed at a higher rate than if you were retired with no other income. People simply don’t pay enough attention to after-tax returns.