A 4% US yield and a 4% franked yield are not the same money
Foreign dividends carry no franking, lose 15% to US withholding if you lodged the right form and 30% if you did not, and arrive in a currency that moves further in a year than most dividends do.
Two companies, one in Sydney and one in New York, both yielding 4%. An Australian investor buys a parcel of each. What arrives in the account, and what it is worth once tax has finished with it, are not close to equal. The yield column has no way of telling you that, and almost every article about dividend investing was written in a country where the question does not come up.
The credit the American one never had
A fully franked Australian dividend arrives with a receipt for company tax already paid, and that receipt has cash value. The arithmetic is in the 4% to 10% piece: divide by 0.7 and a fully franked 4% does the pre tax work of about 5.7%.
A foreign dividend has no franking. There is no receipt, because no Australian company tax was paid on it. That much most people know.
The part people do not know is the shape of the difference, and it is not simply that one has a credit and one does not.
A franking credit can be refunded. If your credits exceed the tax you owe, the difference comes back to you as cash, which is why franking is worth most to investors on low rates and in pension phase. A foreign tax offset generally does not work that way. It reduces Australian tax you were going to pay anyway, and it is not refundable, so if you owe little or nothing there is nothing for it to reduce. The lower your tax rate, the wider the gap between those two dividends gets.
Show the numbers
| Fully franked, Sydney | Unfranked, New York | |
|---|---|---|
| Nil | 5.71% | 3.40% |
| 15% | 4.86% | 3.40% |
| 30% | 4.00% | 2.80% |
| 37% | 3.60% | 2.52% |
| 45% | 3.14% | 2.20% |
On nil tax the Sydney dividend is worth 5.71% and the New York one 3.40%, because one credit comes back as cash and the other is simply gone. The gap narrows as the rate rises. It doesn't close, and it doesn't reverse.
The 15% that leaves before you see it
The United States withholds tax on dividends paid to foreign investors before the money leaves the country. The default rate is 30%.
Australia has a treaty with the United States that reduces it to 15%, but the reduction is not automatic. You get it by lodging a W-8BEN form, which certifies you are an Australian resident for tax purposes. Every Australian broker offering US shares handles this, usually during account opening, and most people tick through it without registering what it was.
Two things follow, and the second one catches people who did everything right the first time.
If the form was never lodged, 30% of every US dividend has been leaving instead of 15%. On a 4% yield that is the difference between 3.4% and 2.8% reaching you, permanently, for no reason.
And the form expires. A W-8BEN is generally valid until the end of the third calendar year after you sign it. Then it has to be lodged again. Brokers usually prompt you, prompts are usually emails, and emails are usually ignored. It is worth knowing which year yours lapses rather than discovering it in a statement.
Foreign is not one place
It is tempting to file everything that is not the ASX under one heading, and the rates make that a bad idea.
The United Kingdom does not withhold tax on dividends at all, so a London listed payment arrives whole. Several European markets withhold at high rates and offer a treaty reduction that must be reclaimed afterwards through a process which is, to put it politely, not designed for retail investors, so the theoretical rate and the rate you actually end up paying can differ for years.
The practical version: before you buy a dividend payer listed outside Australia, find out what that market withholds, whether the treaty rate is automatic or has to be claimed, and what your broker does about it. It is one search per market, once, and it changes the yield you are actually buying.
The currency is a second dividend policy you did not choose
The payment is declared in the company's currency and lands in yours. Between those two moments sits an exchange rate that nobody consulted you about.
The Australian dollar routinely moves further in a year than a mature company moves its dividend. Which means your income from a foreign holding can fall in a year the company raised its payment, rise in a year the company held it flat, and do neither of those things for any reason connected to the business you actually researched.
Over a long enough period this washes out, and nobody pays bills over a long enough period. If you are planning around what lands, plan in the currency the bills are in.
What you get in exchange
None of the above is an argument for staying home. Australia is a small market that is heavily weighted to banks and miners, and the concentration that produces is a real risk that owning foreign companies genuinely fixes.
There is also a timing benefit that gets overlooked, and it is part of how a year of income is actually built. Most US companies pay quarterly, while the ASX pays twice a year, so foreign holdings land in months Australian ones do not. If the gaps in your income calendar bother you, that is the honest way to fill them, rather than hunting for monthly payers.
What this actually changes
Only one habit, and it is a small one. Stop comparing headline yields across borders, because the number means something different on each side and the difference is not a rounding error.
Compare what reaches you. Take the foreign yield, remove the withholding, convert it, and then set it beside the grossed up Australian one. Sometimes the foreign company still wins, for growth or for exposure you cannot get here. But you will have compared two things that are actually the same kind of thing, which is more than a screener will ever do for you.
See the whole portfolio in one currency
Dividend Guardian takes holdings from fifteen exchanges in one list, from the ASX and New York to London, Toronto, Tokyo and Singapore, and converts foreign payments at a stated rate, with the date and the source, the European Central Bank, rather than a number nobody can check. Then it puts the payments in the months they actually land, which is the only way to see whether a foreign holding fills a gap in your year or lands on a month that was already full. Start free, with no account and no broker login.
For A$6 a month or A$60 a year, Guardian keeps watching: every payment recorded per share, your income by company and by sector, and a note when a company confirms a change to what it pays. There's a 30 day money-back guarantee.
Build my Dividend PaycheckDividend Guardian provides information and estimates from public data, not personal financial advice, and nothing here is a recommendation to buy, hold or sell anything. Withholding rates, treaty rates and the forms that claim them change, and how any of this lands on your return depends entirely on your own circumstances, so confirm the current position with the ATO, a registered tax agent or your broker rather than with an article. Guardian reports confirmed changes; it does not predict them.