What Really Happens To Your US Dividends

Unknown Speaker

You see a 4% dividend yield on your broker screen. Looks good, right? But how much of that 4% actually lands in your account?

Sophie

After the tax man takes his share -- and I'm not even talking about UK tax yet -- and after those FX conversion fees you probably didn't notice... that 4% is closer to 2.8%. And that gap? It's not on your broker's summary page.

Unknown Speaker

Welcome to Net Worth It -- the UK dividend investing podcast that shows you what you actually keep.

Unknown Speaker

I'm Matt.

Sophie

And I'm Sophie. This podcast is for educational and informational purposes only. It does not constitute financial advice. The value of investments can fall as well as rise, and you may get back less than you invest. Past performance does not guarantee future results. Always do your own research and consider seeking advice from a qualified, FCA-regulated financial adviser.

Unknown Speaker

Today we're looking at something that caught me completely off guard when I first started tracking dividends: the massive gap between what your broker tells you you're earning, and what actually lands in your account. Let's dig in.

Unknown Speaker

Right, so picture this. You're on Trading212, you've got your ISA set up, and you're browsing US dividend stocks. You find one that looks solid -- a big pharmaceutical company with a juicy-looking yield. You think, "Perfect. I'll put in ten grand and collect some nice dividends." Feels great.

Sophie

Let's use Bristol-Myers Squibb as an example -- purely illustrative, not a recommendation to buy or sell. Their yield is showing around 4.5%, so on ten grand you'd be expecting roughly £450 a year. That's the number on your screen. But it's gross. It's before anything gets deducted.

Unknown Speaker

Wait, deducted? I thought ISAs were tax-free?

Sophie

They are. For UK tax. But here's the thing most people don't realise until it's too late: when you hold US stocks, even in an ISA, the US tax authorities still withhold tax on your dividends before they even leave the United States.

Unknown Speaker

Hang on. So my ISA doesn't protect me from US tax?

Sophie

Not from US withholding tax, no. The ISA wrapper protects you from UK dividend tax, but the US doesn't care about that. They see a dividend being paid to a non-US person, and they take 15% off the top if you've filled in a W-8BEN form. If you haven't filled it in, they take 30%. Either way, it's gone before you see it.

Unknown Speaker

So that's already a chunk missing. But you mentioned FX fees too?

Sophie

Exactly. That dividend is paid in US dollars. Your broker has to convert it to pounds for your ISA. And that conversion isn't free.

Unknown Speaker

This is starting to sound like death by a thousand cuts.

Sophie

Let's walk through the full chain. Say you've invested £10,000 in that US stock with a 4.5% gross yield. You're expecting £450 a year in dividends, paid quarterly. So roughly £112.50 per quarter.

Unknown Speaker

Okay, so far so good.

Sophie

Now, the dividend gets paid in dollars. Let's say the exchange rate is around 1.25 dollars to the pound -- exchange rates vary daily, this is just illustrative -- so that £112.50 dividend is actually about $140 being paid by the company.

Unknown Speaker

Right.

Sophie

First deduction: the US withholding tax. 15% comes off immediately. So $140 becomes $119. That $21 is just gone. You will never see it. It's not recoverable in an ISA.

Unknown Speaker

That's already painful.

Sophie

Now your broker converts that $119 back into pounds. Trading212 charges a 0.15% FX conversion fee on ISA accounts, which is actually one of the lowest in the industry. So you lose another 15 pence on that $119 conversion. You end up with roughly £95.05 in your account.

Unknown Speaker

Wait. So I started expecting £112.50, and I actually received £95.05?

Sophie

Correct. That's a loss of about £17.45 per quarter, or roughly £70 per year on that £10,000 investment.

Unknown Speaker

Blimey. So my "4.5% yield" is actually more like... what, 3.8%?

Sophie

For this example, yes. About 3.8% net after those two deductions. And remember, this is with Trading212's relatively low FX fee. If you're with a traditional broker charging 0.75% or even 1.5% on FX conversions, that gap gets even wider.

Unknown Speaker

So the problem isn't just the withholding tax, it's that these costs are invisible until you actually do the maths?

Sophie

Exactly. Your broker shows you the gross yield. Your dividend notifications might show the US withholding tax line if you look closely, but the FX fee? That's usually just baked into the exchange rate they give you. It's not broken out as a separate line item.

Unknown Speaker

This feels like one of those things where once you know about it, you can't unsee it.

Sophie

Absolutely. And it scales. If you've got a £50,000 portfolio generating a 4% gross yield from US stocks, you're expecting £2,000 a year. But after 15% withholding tax and FX fees, you're actually receiving closer to £1,695 to £1,700 depending on your broker. That's a £300 to £325 shortfall annually.

Unknown Speaker

Three hundred quid a year just evaporating.

Sophie

And here's the thing: if those same stocks were in a GIA instead of an ISA, you'd still lose the 15% to US withholding tax, but now you'd also owe UK dividend tax on top -- assuming you're over the £500 dividend allowance, which at £2,000 gross you definitely are. We'll cover GIA vs ISA placement in a future episode, but the point is: even in the "tax-free" ISA, US stocks cost you more than the headline yield suggests.

Unknown Speaker

So when I'm comparing a 4% US stock to a 3% UK stock, I need to think about what I'm actually going to receive, not just what the label says.

Sophie

Exactly. The UK stock in your ISA? That 3% is pretty much what you get. No withholding tax, no FX conversion. The 4% US stock? You're netting closer to 3.4% after deductions. Suddenly that gap doesn't look so big.

Unknown Speaker

Okay, so this is clearly something every dividend investor needs to be tracking. But I'm guessing most people aren't sitting there with a spreadsheet calculating withholding tax and FX fees for every holding.

Sophie

No, and that's exactly the problem. Most portfolio trackers show you the gross yield. They'll tell you "your portfolio yields 4.2%," but they're not showing you the net number after all these deductions.

Unknown Speaker

So how would someone actually see this?

Sophie

This is where something like Nestor - Dividend Tracker comes in. You import your Trading212 portfolio, and it calculates your true income -- the net yield after withholding tax and FX conversion fees for every holding. So instead of seeing that misleading 4.5% gross on your US stocks, you see the 3.8% you're actually receiving.

Unknown Speaker

And that's automatic? Like, it knows which stocks have withholding tax?

Sophie

Yes. It identifies the country of domicile for each stock, applies the relevant withholding tax rate based on the UK's double taxation treaties, factors in your broker's FX fee structure, and shows you the true net yield in pounds.

Unknown Speaker

So you can actually compare apples to apples -- a US stock's net yield versus a UK stock's net yield.

Sophie

Exactly. And it shows you the total annual impact in pounds. So if you've got that £50,000 portfolio, you can see "you're losing £320 a year to withholding tax and FX fees" as a single number, rather than trying to piece it together from quarterly dividend statements.

Unknown Speaker

That's the kind of thing that changes how you think about allocation. Like, maybe I don't need quite as many US stocks if the net yield isn't actually that different from UK alternatives.

Sophie

Right. Or maybe you still want the US exposure for diversification or growth potential, but at least now you're making that decision with the full picture.

Sophie

So here's the one thing to take away from today: the dividend yield on your broker screen is not the dividend yield in your pocket. For US stocks in an ISA, expect to lose roughly 15-17% of that headline number to withholding tax and FX fees. That's permanent, it's not recoverable, and it matters more the larger your portfolio gets.

Unknown Speaker

The yield on your screen is not the yield in your pocket. I'm going to be thinking about that every time I look at my holdings now.

Unknown Speaker

If you want to see your actual net yield across your entire portfolio, check out Nestor. You can import your Trading212 account in about 30 seconds, and it'll show you exactly what you're keeping after all the deductions. Link's in the show notes.

Sophie

And if you found this useful, leave us a rating on Spotify or Apple Podcasts -- it helps other dividend investors find the show. Remember, nothing in this episode is personal financial advice. For decisions about your own portfolio, consider consulting an FCA-regulated adviser.

Unknown Speaker

Next week we're talking about the £500 dividend allowance and why most people blow through it without realising. See you Tuesday.

Sophie

See you then.