Why do US shares pay lower dividends?

  • 09 Dec 2016
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Why do US shares pay lower dividends?

The reasons a company pays lower dividends are:

           Intralink Lge Petal Graphic 3 Col:Line It is not tax effective to do so; and/or

           Intralink Lge Petal Graphic 3 Col:Line The company has good growth opportunities, so it is more worthwhile to invest back into the business, than return funds to shareholders.

On both these counts US companies have less reason to want to pay out dividends.

They prefer capital gains to dividends and they do not have franking credits. As a result, they tend to buy back their own shares with some of the funds an Australian company will pay out as dividends. The effect is identical, apart from the fact that there are no franking credits as the following example shows.

us-dividend-example While there is a loss of income, this is just a different use of the funds. The real loss is the franking credits in a super fund.

We do like franking credits, but the greater growth potential, access to industries not available on the Australian market and risk reduction benefits, make it necessary to include a significant proportion of US investments in a well-structured portfolio.

Please do not hesitate to call or email your adviser should you have any questions.