Saturday, 20 June 2020

Some thoughts on Dividend Withholding Taxes (DWT) for Singaporeans

For non-US investors, there is a 30% Dividend Withholding Tax (DWT) on dividends payouts from US-based companies. For Singaporeans, individuals do not get taxed on their dividends received but are subject to a 30% dividend withholding tax for companies incorporated in USA.

Another thing to note is that Singaporeans do not have capital gain tax. One way to attempt to avoid DWT is to sell before the ex-dividend date and buy it back. Usually, we expect a stock to fall by its dividend on the ex-dividend date.

Example
A $100 stock with a $3 dividend is expected to be $97 on the ex-dividend date.
Since we have a 30% DWT, we only receive $2.10 instead of $3 per share. If we sell the stock 1 day before the ex-dividend date and purchase it back on the ex-dividend date, we have a 30% buffer. If you purchase the stock from $97 to $97.90, you effectively 'avoided' the DWT (before fees) since we would not have received 30% of the dividends ($0.90).

As long as a stock drops by more than 70% of its dividend on the ex-dividend, there is a chance that we can buy back and avoid the DWT.

IBKR has a Good After Time (GAT) and Market-on-Close (MOC) which helps to 'automate' this process.

This does not always work since stocks don't always drop by the exact dividend amount and you may end up losing your 'free' dividend. You also need to consider brokerage fees if you want to try this. Another thing to note is volatility, if volatility high, you may end up selling your stock much lower or buying back higher, though this may also work the other way. Finally, selling and buying back is effectively reinvesting our dividends into the stock on the same date which most people do not do.

Example using SPY using closing prices
Buy & Hold does not take dividend reinvestment into account.

If you compare CSPX (Irish domiciled S&P500 ETF, 15% DWT), selling and buying back gives you at ~8% higher return as we are able to 'avoid' the DWT completely. This is despite having a commission of $12 per trade. If you have access to low-cost brokers, this strategy might be worth considering.

For individual stocks, they should behave more 'normally' where they drop by the dividend amount unless volatility is high or there is news about the stock.

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