Last week, we took a look at some of the better dividend payers from all around the world. Many pay considerable dividends and offer good diversification which certainly makes them attractive picks. A few visitors were quick to point out that withholding taxes can have a significant impact on those dividends.

What are withholding taxes? 

When a foreign company decides to pay back its investors through dividends, there is often a part of that amount that is taken by the government where that tax is being paid. For example, foreign investors that decide to a buy a French stock will receive a dividend like any others but the French government (and almost every other government in the world) takes part of that income. Why? There are many reasons but it’s a form of tax on money leaving the country. These are not necessarily easy to track but they are generally between 0% and 30% depending on the country.

An Example

Suppose that an investor receives a dividend of $100 from that French stock.  The investor will end up only receiving $75 as the French government will take a 25% cut. That is one of the most expensive countries to buy stocks in and is certainly worth considering when looking at those attractive dividend yields.

It’s Not All Bad Though

It’s important to remember that you end up paying taxes on US dividends as well. The main difference is the rate (lower in this case but that’s not always the case) so you are simply paying this amount of taxes upfront rather than when filing your taxes.  Another key point is that in almost all cases, there will not be “double taxation”. That means that the dividend that you receive will not be taxed by the US government since you already paid your share to the French government.

Each Country Is Different

It’s important to look carefully at the rules for each country. Some have higher rates, others are lower, for some you don’t get hit by withholding taxes in your non-taxable accounts, etc. I don’t think that these things make a huge difference in most cases and it still makes a lot of sense to add international dividend stocks to almost any portfolio.

Have You Had Any Experience With Withholding Taxes?

One of the questions that I get the most often is how to protect a portfolio. I think that many investors are scared these days. Why? Markets have been more volatile in recent months and it’s scary for everyone involved. Especially those that have less years to make up any potential losses. There are many different reasons why markets have reacted so violently. The first one would be the whole credit crisis that makes it unclear what Europe (and indirectly the world) will look like a few years from now.  That, the uncertainty around banks, real estate prices and more have greatly diminished investor’s confidence.

All of those would be enough to make markets volatile but when you add electronic trading, high frequency traders and hedge funds, it seems to add to the violence of moves. The fact that big movements in the markets then setup new trades from all of these investors seems to make movements even more violent. Are markets too volatile? I personally don’t think so. If markets go up and down 2-3% every day but the end result is not significant, it should not make a big difference to most of us. In the end, most of us are trading with a long term perspective right?

How To Protect Your Portfolio?

One of the most common questions that I get when markets are so volatile is how to protect such a portfolio from big movements. There are no easy or clear answers but here are the main strategies that can be tried. I think it’s important to start off by doing these 2 things:

-Do not worry about short term movements (markets crashing for 1 day and rebounding the next one is not a cause for worry)
-Do not panic (trades and moves made when someone is anxious, upset or scared are almost never good ones)

Here are the main things that you can add into your portfolio. Any movements should be done gradually over time to reduce the volatility of your portfolio. It is almost never a good idea to start selling right away when markets decline. Gradual moves though can improve the performance of your portfolio over time.

7 Ways To Protect Your Portfolio

-Only Invest What You Can Afford To: There is no issue in holding some cash in your portfolio. I personally do not invest anything that I cannot afford to suffer significant (15-20%) losses on.. if you have trouble sleeping because you worry too much, you probably should hold less stocks and more cash.

-Improve your asset allocation: You should not have all of your eggs in equities or in bonds. Ideally, you have a mix between the two. It seems simple but that is probably the most significant

-Do Not Use Leveraged/Inverse Products: Many products are sold as a way to protect your portfolio. Such products are generally build with very short term goals in mind and it’s not what you should be using for longer term strategies.

-Improve Your Diversification: I love technology stocks but holding Google, Apple and Microsoft will provide very little protection in market downturns. It’s important to try to hold companies in different sectors that will help you perform better over time. This also means having more international stocks.

-Hold Alternative Assets: Buying inflation protected bonds, gold or other commodities can help diversify your portfolio. It’s not the first step I would take but as your portfolio becomes bigger, such strategies can certainly make a big difference.

-Pay Attention To Fiscal Impacts: One of the biggest mistakes that investors do when they panic is selling their biggest assets. That may or may not be the best decision. But you should always look at the taxes that will need to be paid. You might have lost $10,000 on a stock and want to sell but if you had made significant profits in previous years, you will be stuck paying capital gains taxes on those.

-Focus On The Right Metrics: I discussed how dividend investors that are using a dividend portfolio to build income should focus on the income that the portfolio generates rather than every day’s profit and losses and that can be true of any portfolio. Keep in mind that market losses means you are able to buy more of those assets which is a good thing. It might not feel that way but if you take the right perspective, you will not feel as much panic.

After a successful year of trading in 2009, last year was a home run in almost every possible way. I do truly believe that the main changes I made last year ended up making a positive difference, especially my decision to stop opening trades later in the year. I know that it was not the most popular decision since those stock picks are among the most read posts but in the end, getting higher returns is the objective.

Last year, I got many questions regarding the stock picks or other technology stocks that I follow. I answered many of them by email, some were comments on the blog, but there was no ideal place really. I ended up creating a new mailing list, dedicated to tech stocks and the trades that I do. If you would like to get more information about the picks, other stocks that I like, or don’t, I highly encourage you to join, it’s free. I will also try to answer some of the questions that I get there since I’m not going to be writing 5 different posts about one trade. The mailing list is sent once every 1 or 2 weeks.

To join the list, simply fill out your name and email here:

Biggest Change For 2012

In the past, I’ve held at most 5 live trades on the stocks that I follow. This year, I will increase that number to 7. Why? There are a few different reasons. First off, it will help me trade more often since chances are greater that 1 of those 7 trades reaches its stop gain or stop loss. Also, it gives me less concentration on a few different names. Each person might have a different view on this but I personally prefer doing a few more picks with less money involved. That means less gains when a trade goes exceptionally well but also less losses when they don’t.

Why Not Add Even More Live Trades?

It’s always a matter of opportunities isn’t it? I track a universe of stocks and try finding opportunities in there. It’s not always easy to find good ones, even with 5. But I do believe that I will be more active on many of the recently turned public stocks such as Groupon (GRPN), Pandora (P), LinkedIn (LNKD) and even Zynga (ZNGA) as well future ones such as Facebook.  That will certainly provide more trading opportunities which is what I’m counting on to be honest. It’s a fairly big change so there is always that possibility that at some points in the year, I will not see good opportunities and prefer not trading for a few days/weeks but I somehow think I’ll find some good ones.

Better At Tracking

I’ve been reliable about posting trades on this blog but not as much in updating the live positions on the right sidebar and the results in the stock picks page. I will make an effort to make it easier for you to track my picks and performance.

What’s The Plan Now?

The plan is to continue to monitor the markets for the next 2 weeks, start preparing myself and then I will be opening a couple of trades in the first week of January. If you have any questions about the tech trades, comments or simply an opinion, feel free to contact me, I’d love to hear from you.