Weekend Edition – Dividend Quirks From Abroad

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On Friday, while writing up an overview of the second quarter earnings from Indian software company Infosys (INFY), I noticed a few quirks regarding the stock’s dividend yield that I felt I needed to highlight. Infosys trades on the New York Stock Exchange as an American Depository Receipt, or ADR. Though technically not a stock, ADRs still trade like stocks. Ultimately, they give investors an easier chance to invest in foreign companies. However, ADRs can be confusing, especially when it comes to their dividend payouts and reported yields. As such, investors need to be aware of what they might be investing in prior to making any decisions.

Often, foreign companies like Infosys and other ADRs do not declare consistent quarterly dividend yields, unlike most U.S. companies. Because of this, it is hard for investors to get a true sense of how a company is constantly increasing its dividends and a picture of its annualized dividend yield. This confusion and inconsistency might not make these stocks the best investment for investors seeking stable income payouts.

Currency Complications

Dividend declaration inconsistency is not the only problem with investing in ADRs, however. It may seem obvious, but foreign currency exchange ultimately plays a meaningful role with ADRs and their dividend yields as well. These foreign companies’ ADR dividends are typically declared in the operating currency for the company, but paid to the ADR holders in dollars. The exchange rate plays a big role in what U.S. investors ultimately receive in dividend payouts.

But for argument’s sake, let’s say that these foreign companies do pay out consistent dividends and the exchange rates do not make a meaningful impact. This does not mean investors will end up getting what the yield suggests; taxes end up playing a role. Many countries require companies that pay dividends to foreign shareholders to withhold taxes from the payout, thus reducing the total dividend paid to the shareholder. Though these taxes are deductible for individual tax purposes, it is still a factor that investors should be aware of prior to making investing decisions.