Some of my readers know that I am of German / Polish origin. Born in Poland, growing up in Germany, carrying 2 passports, speaking both languages like a native. My Polish language skills are slightly below my German skills by now, especially when it comes to writing and grammar, but after all, Polish is one of the most difficult languages in the world.
Having grown up in Germany, my first investments also happened to be centered around German companies. I put my first hard earned cash in companies like BASF, Daimler, BMW, E.On, Altana, Deutsche Bank, and TUI and traded them based on news cycles. Sometimes successfully, sometimes less so.
But there was this comfort that I had when buying German equities. I knew these companies well. What they are doing, where their headquarter is. Their CEOs were frequently visible on the news. Their business models were clear and easy to understand. When buying shares of these companies, I had that positive and comfortable feeling to know what I am buying.
I started to expand my horizon into other European and US equities when my investment targets changed. My quest for creating a flow of passive income made it necessary for me to adapt. German companies pay usually dividends only once a year, and a large majority of them does so in April or May. There are a few exceptions, like Siemens which pays usually in January, but if I wanted to create a diversified portfolio that would send me dividends monthly to my account, then I had to expand my attention to abroad. That’s when I started to learn.
The three most important things I had to learn were about dividend payment cycles, withholding taxes on dividends for foreign investors, and currency exchange risks. Let’s take a look at some examples.
The UK has a wild mix of companies paying annual, semi-annual, and quarterly dividends. The UK also doesn’t have any withholding taxes on dividends, making it super-interesting for foreign investors. Companies in the Netherlands have similar payment cycles with the UK, but the withholding tax is 15%. The US has a withholding tax of 30%, but there is a deal with Germany to get it reduced to only 15% making it still attractive. Companies in the US are paying mostly quarterly dividends. Some even monthly. Switzerland has some great companies, but there is no simple procedure to reduce the withholding taxes on dividends, making it very unattractive to put any of my money there.
And then for all these countries there is the risk of fluctuations in currency. In a super-negative scenario, it can happen that the company you invest in is really doing great, but when the currency goes the wrong way then you might still see the value of your investment shrinking down. Of course, it can also happen vice-versa, seeing the value of your investment going up despite no, or even with negative news in the headlines.
Every investment is an opportunity to learn
With my goal being to create passive income I had no choice but to look beyond my comfort zone. And it turned out to be a great journey. Not only did I learn more about taxes, currencies, and regulations in many countries. I also got to know much more about companies from abroad, which are really not just enriching, but also shaping our lives. It is astonishing to realize how large and powerful some companies have become. How their products, policies, and engagement have a direct impact on what we wear, eat, drink, listen, read, and generally experience on a daily basis.
It can also be a little scary. But that’s a whole other topic.
The key take-away here is that investing abroad is a great opportunity not only to improve our financial situation. It is also a tool to learn about how the world works. How things are connected, how products and services develop across the globe. How politics and policies shape agendas and effect human lives. And ultimately, how all those things influence our lives on a daily basis.