I love the smell of dividends in the morning…
This post is a quick introduction to dividends with a focus on how they behave in Japan. There are several schools of thought on dividends and different people will want to approach them in different ways.
What are dividends?
Dividends are regular or irregular payments made by companies to their shareholders. It is a form of profit-sharing. Not all companies pay dividends. You can find dividend information by searching online for ‘company name + dividend’ or similar.
You can also use Yahoo Finance to find the information (Google Finance used to be good but for some reason they ‘updated’ it and now it’s useless). If you are looking for Japanese stock information be sure to use Yahoo Finance Japan as the US site doesn’t show dividend information for Japan-listed stocks for some reason.
What are the benefits of dividends?
The benefit of dividends is that they can provide regular passive income. As long as companies continue paying the dividend you don’t have to do anything to maintain your income. Many companies increase their dividends over time, often at a rate greater than inflation. Investors don’t have to sell their investments to get money.
A lot of the growth in the stock market comes from dividends as opposed to capital gains.
Dividend growth investing is a popular approach to investing and retirement that involves investing in stable, dividend-paying companies and holding for the long term. Here’s an enthusiastic write-up from Jason Fieber (who used to write the website Dividend Mantra and is now Mr. Free at 33).
What are the drawbacks of dividends?
There are several. The first is that dividends are not guaranteed, and can be cut or even eliminated by companies.
Another is that dividends are tax-inefficient. If companies or funds reinvest dividends (or buy back stock) instead of paying out cash to investors those funds can grow tax-free. However if investors receive a dividend they will need to pay tax on it and over time their investments will probably grow more slowly.
If investors then want to reinvest the dividend, they may have to pay fees and other costs which could have been avoided if the money was reinvested internally.
People who focus on dividends will probably choose individual companies, which can produce worse results than just buying an index (which will also contain growth companies that may not pay a dividend).
How are dividends taxed in Japan?
Dividends are taxed at 20.315%. If you hold the shares or funds in a NISA account you will not pay tax on the dividends.
If you hold the shares or funds in a taxable account (特定口座) the tax will be deducted and paid by your broker, and you don’t have to do anything else.
If you hold the shares in an ordinary account, you will have to declare and pay the tax yourself. This can be more expensive but may allow you to use deductions. I don’t do this but perhaps any tax ninjas could explain this in the comments 🙂
This article in Japanese explains the various ways to deal with taxes on dividends.
If the shares or funds are listed in the US, the US government will take a 10% withholding tax (reduced rate for residents of Japan). You can deduct this from your Japanese taxes but will have to submit a tax return to do so. In a NISA account you cannot recover this US tax as there are no Japanese taxes to deduct it from.
What’s the best approach?
From a mathematical perspective, it appears the following is true (there is a great thread on the forum about this that goes into a lot of detail):
The best way to invest may be to buy low-cost Japanese mutual funds that reinvest dividends within a diversified portfolio. This can be done with three funds: a developed world equity (ex-Japan) fund, a developing world equity fund, and a Japan fund. To match world markets, the proportions would be 80% developed, 12% developing, and 8% Japan. For many mutual funds you can choose to reinvest dividends when you buy them. This is usually called 「配当金再投資」 or something similar.
For foreign-domiciled ETFs, you can sometimes buy ‘accumulation’ versions which reinvest dividends as opposed to the ‘distribution’ ones that pay them out.
Reinvesting dividends is perhaps more likely to grow over time and investors that adopt it will probably end up with more money in the end.
However, dividend-focused investing has some psychological benefits. It’s very encouraging to see your dividends arrive every month, especially if they grow over time. You can spend the money and it is very clear how much income you are receiving from your investments.
What do you do?
Well, I actually use both approaches. Most of my investments are in index funds but I also have a dividend-focused portfolio of individual companies. My goal is to have the dividends provide me with a basic income in the future. For now it contributes an ever-growing proportion of my NISA allocation each year.
How about you? Do you have a dividend strategy? What is your focus for investing?
Hi, if you don’t mind, I have a question about what you mentioned briefly in the above post.
My taxes are thankfully a matter the accountants at my workplace are involved with; I personally am somewhat paranoid about 確定申告, would ideally like to avoid it at all cost.
You mentioned taxable accounts (特定口座). Does anyone know whether the the ‘tax (…) deducted and paid by your broker’ thing also applies for regular buy and sell transactions? [mostly interested in ETFs, but would be willing to put up with regular stocks or mutual funds if that were my only option allowing me to avoid the dreaded tax declaration]
Yep, the also handle capital gains for you. So if you have a NISA and a tax-reporting account you shouldn’t have to submit a tax form (unless you make over 20m I believe, at which point the rules change a bit) 🙂
Just a quick quibble: both tokutei and ippan accounts are taxable, but the former is tax-reporting and the latter is not 🙂
Thank you for your swift reply!
Since I might end up leaving Japan soon after the Olympics, I’m somewhat wary of the 5 yr. min. NISA period, however, good to know the tokutei accounts are an option!
Sorry to be all contrarian today, but NISA accounts have no minimum investment period -you can take your money out whenever you want. The maximum duration of the account is five years for the normal one and twenty for the tsumitate one. Check out the page on the RJ website for more info!
> If companies or funds reinvest dividends (or buy back stock) instead of paying out cash to investors those funds can grow tax-free.
It’s worth noting it’s not tax-free. Those dividends that were reinvested just get reflected as growth which is later taxed.
I like to just think of it as deferring the taxation(which is a good thing since that money can compound a lot before eventually getting taxed)
That’s a really good point! Thanks for the correction 🙂
https://kabu.com/investment/guide/syoukenzeisei/tokutei/default.html
I just happened to be reading on this earlier so I thought I’d mention it. There are 2 types of Tokutei (特定) accounts.
– 特定口座（源泉あり） Tokutei Kouza (Gensen Ari)
– 特定口座（源泉なし）Tokutei Kouza (Gensen Nashi)
I’m not sure what Gensen (源泉) translate to in English, tax slip?
Anyway, Gensen Ari is the one that does tax reporting for you.
gensen is “source” and I believe that’s a reduction of 源泉徴収 which is “deduction at the source”.
If I’m not mistaken, the ari version deducts the tax automatically. The nashi version just sends you a full tax report which you can then use to file the taxes yourself(possibly if you wanted to claim deductions or something)
I have both 特定 and 一般 securities accounts and in both cases the dividend tax is subtracted before the dividend arrives in my account. One thing not mentioned above, if you are a US citizen you’ll still need to report those dividends to the US IRS (regardless of whether you have to file 確定申告 in Japan) but you can also report the Japanese tax paid and that tends to reduce any US taxes, depending on your AMT calculations.
Are you sure the ippan account is deducting the *Japanese* taxes? Both will deduct the US withholding tax…
This sounds way too much like double taxation for my comfort. This will be the first year I’ll be filing taxes in Japan along with my Japanese wife who is still working part time. Fingers crossed that our tax bite is not over-the-top.
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You mention accumulating funds in the post. Do you know how they are treated for taxation in Japan? Is the tax paid on an ongoing basis on the accumulated dividends or is it deferred and paid on the capital gains (which the dividends have been converted into) when the shares are sold?
I’m sorry I don’t know. This year will be the first for which I’m liable/reporting to Japanese tax authority. Previously, I filed in the US.