Foreign shares

[starter]

What are people's views about foreign shares for HYP style strategies?

Are they a good diversification and an extra source of dividend shares?

Or are they dangerous? And why?

I thought I had a good grasp of PYAD's reasoning in TMF and I agree with it, but I'm not sure I understand the insistence on UK shares over large American companies.

EDIT: I looked through this board for a similar discussion but couldn't find it. Please feel free to point me there like a wayward child.

[SalvorHardin]

What are people's views about foreign shares for HYP style strategies?

Are they a good diversification and an extra source of dividend shares?

It's an excellent idea. Both from a diversification point of view and that it gives you a much bigger pool of companies to choose from. The HYP purists will disagree of course.

There were good reasons in the pre-commercial internet days for avoiding foreign shares, mostly due to cost and difficulty in obtaining information, but nowadays it's almost as easy to buy shares in Procter & Gamble as it is in Unilever.

Dividend withholding tax will be an issue however as it reduces the published yields for British investors.

A good example is the Canadian banks. Unlike the British banks, these still pay dividends and are likely to continue to do so. Bank of Montreal yields 6.3% or 4.7% after withholding tax (which can be offset against your UK tax). IMHO Canada's banks are better run than the British banks.

BlackRock has an article from 7th April about Canadian bank dividends. Link below:

https://www.blackrockblog.com/can/2020/04/07/canadian-bank-dividends-tough-but-not-insurmountable-challenges/

[dealtn]

I thought I had a good grasp of PYAD's reasoning in TMF and I agree with it, but I'm not sure I understand the insistence on UK shares over large American companies.

I suspect it's because the "strategy" was designed for someone who was "happily ignorant" and not designed for someone that wanted the "best" outcome, and measuring against alternatives, but as an alternative to a "pension annuity". With that population in mind, whose pension incomes were £, and living in the UK, it makes sense from the "simplicity" perspective to limit the share population to UK shares. FX risk and currency hedging, or not, are just unnecessary complications.

The fact that many UK listed shares have overseas earnings, for instance, or that the goods many pensioners might buy ultimately come from abroad, are irrelevant.

From a practical perspective for this "rules based" system you also have the issue that dividends historically are seen as more important as part of the total return that equities offer you in the Uk, than elsewhere, particularly the US. This might be problematic as low dividend screening will eliminate all bar the riskiest of US shares unless you have different dividend yield hurdles in different markets.

The strategy is prone to provoking arguments as it is, let alone introducing alternative additional rules.

[Lootman]

I thought I had a good grasp of PYAD's reasoning in TMF and I agree with it, but I'm not sure I understand the insistence on UK shares over large American companies.

I suspect it's because the "strategy" was designed for someone who was "happily ignorant" and not designed for someone that wanted the "best" outcome, and measuring against alternatives, but as an alternative to a "pension annuity".

I feel sure that is a part of it. But I think Pyad also was recommending what he knew and I never saw any evidence that he understood any class of securities other than large-cap UK shares. I can't recall him ever posting about smallcaps, foreign shares, bonds, derivatives or anything else.

That limitation isn't good enough for many people. Higher yielding large-cap UK shares are only about 3% of the global market cap of equities, and maybe only 1% if you include bonds. Why artificially restrict yourself in that way?

Moderator Message:
There's no evidence that he didn't understand them, either. And his long-running value portfolio certainly went outside large-cap shares on occasion. It had AIM-listed Dart Group in at the end, I recall. -- MDW1954

[onslow]

Dividend withholding tax will be an issue however as it reduces the published yields for British investors.

Good point, however dont forget some SIPPs offer the ability to receive US dividends without any US withholding tax deducted (I'm with II for this)

[starter]

Dividend withholding tax will be an issue however as it reduces the published yields for British investors.

Good point, however dont forget some SIPPs offer the ability to receive US dividends without any US withholding tax deducted (I'm with II for this)

So the next question was going to be how does that affect SIPPs and ISAs.

I take it with ISAs you can do nothing and with SIPPs it's ask the provider (and depends on jurisdiction). It's that right?

If so are there any foreign shares holders with AJ Bell\YouInvest?

[Wizard]

Good point, however dont forget some SIPPs offer the ability to receive US dividends without any US withholding tax deducted (I'm with II for this)

So the next question was going to be how does that affect SIPPs and ISAs.

I take it with ISAs you can do nothing and with SIPPs it's ask the provider (and depends on jurisdiction). It's that right?

If so are there any foreign shares holders with AJ Bell\YouInvest?

I own IBM in my Hargreaves Lansdown SIPP, having filled in a BENW8 form I suffer no deductions. My recollection is that the US carve out is specifically for pensions so it works for SIPPS but not ISAs, but my memory is not perfect so best to check.

[Bubblesofearth]

Dividend withholding tax will be an issue however as it reduces the published yields for British investors.

Is this true for Global trackers such as Vanguard? Or do they somehow reclaim the tax for investors? About half such funds are US invested currently.

BoE

[starter]

Good point, however dont forget some SIPPs offer the ability to receive US dividends without any US withholding tax deducted (I'm with II for this)

So the next question was going to be how does that affect SIPPs and ISAs.

I take it with ISAs you can do nothing and with SIPPs it's ask the provider (and depends on jurisdiction). It's that right?

If so are there any foreign shares holders with AJ Bell\YouInvest?

I own IBM in my Hargreaves Lansdown SIPP, having filled in a BENW8 form I suffer no deductions. My recollection is that the US carve out is specifically for pensions so it works for SIPPS but not ISAs, but my memory is not perfect so best to check.

So there does seem to be a sound basis that foreign shares are more hassle (and potentially ongoing hassle)

[Wizard]

So the next question was going to be how does that affect SIPPs and ISAs.

I take it with ISAs you can do nothing and with SIPPs it's ask the provider (and depends on jurisdiction). It's that right?

If so are there any foreign shares holders with AJ Bell\YouInvest?

I own IBM in my Hargreaves Lansdown SIPP, having filled in a BENW8 form I suffer no deductions. My recollection is that the US carve out is specifically for pensions so it works for SIPPS but not ISAs, but my memory is not perfect so best to check.

So there does seem to be a sound basis that foreign shares are more hassle (and potentially ongoing hassle)

Not if held in a SIPP, unless you feel filing out a pretty straight forward form every 3 years is too much hassle.

[Charlottesquare]

I hold Berkshire via my SIPP with Hargreaves Lansdown, but of course it has no dividend considerations.

I have also in the past ,within the SIPP, held some Swedish equities.

Whilst one can argue that exchange differences may make the dividends more volatile ,as a fair few UK listed shares declare/account in other currencies they are no more/less volatile than say Shell.

My main considerations beyond the individual company would likely be considerations of which currency (something strong like dollar/euro) and legal jurisdiction considerations regarding accounting standards, culture etc (Can one trust the accounts of companies on some exchanges?)

Personally these days I tend to prefer a UK listed IT for my foreign exposure in particular markets.

[bluedonkey]

Speculation on my part but perhaps if the dividend is received in forex, there are significant bank charges to convert to sterling.

[starter]

Speculation on my part but perhaps if the dividend is received in forex, there are significant bank charges to convert to sterling.

If you have a wide range of foreign companies (including FTSE companies paying out in foreign currency) then the will really only need to worry about a fall in pound sterling.

Not buying shares paying in foreign currency will protect you from this, but so will an income cushion (which we should have anyway) and also keeping a good chunk of dividends in pounds sterling.

EDIT: Just realised I was answering a different question.

[SalvorHardin]

Speculation on my part but perhaps if the dividend is received in forex, there are significant bank charges to convert to sterling.

Not with online brokerage accounts. Typically they charge between 0.5% and 1.5% of the dividend and importantly there's no minimum charge.

Forced conversion to sterling is only required for dividends received in ISAs.

[Lootman]

Speculation on my part but perhaps if the dividend is received in forex, there are significant bank charges to convert to sterling.

Not with online brokerage accounts. Typically they charge between 0.5% and 1.5% of the dividend and importantly there's no minimum charge.

Forced conversion to sterling is only required for dividends received in ISAs.

Yes, just keep a dollar-denominated account for US holdings. Problem solved.

And since there are US-traded ADRs for almost every major international company, USD is the only currency you need to deal with.

[onslow]

Speculation on my part but perhaps if the dividend is received in forex, there are significant bank charges to convert to sterling.

Not with online brokerage accounts. Typically they charge between 0.5% and 1.5% of the dividend and importantly there's no minimum charge.

Forced conversion to sterling is only required for dividends received in ISAs.

Yes, just keep a dollar-denominated account for US holdings. Problem solved.

And since there are US-traded ADRs for almost every major international company, USD is the only currency you need to deal with.

Exactly. I do this with my II SIPP - all dividends from US companies go straight into my USD account and stay there until I either buy more US shares, or decide to convert the currency to GBP(or AUD, or CHF etc etc). As mentioned above II allows US dividends to be paid without any withholding tax deductions.

I think II is the only broker who offers most of these benefits for US shares in SIPPS.