I tend to favour UK shares when it comes to earning a second income. And there’s a very good reason for this – the withholding tax on dividends means the bar is higher for US stocks.
Since the start of the year though, the S&P 500‘s fallen almost 3.754%, while the FTSE 100‘s up 4.25%. So is it worth me taking another look across the Atlantic for passive income opportunities?
The tax issue
For an investor like me, tax is a real consideration when it comes to buying US stocks. There’s a 30% withholding tax to factor in (which is reduced to 15% in my case, with a W-8BEN form).
Stocks are never exactly equivalent because no two companies are identical. But other things being equal, a US stock needs to have a dividend 15% above a UK one for me to make the same return.
That’s a significant hurdle to clear and it hasn’t been the case recently. S&P 500 stocks have tended to trade at a premium to their FTSE 100 counterparts, making the equation even less favourable.
This is why I’ve tended to focus my attention on the UK when it comes to passive income stocks. But with the valuation gap starting to close, it might be time to take a look across the Atlantic.
Dividend stocks
In general, the stocks with the highest yields in the S&P 500 look to me like ones that are facing some significant challenges. But there are one or two shares that I think are potentially interesting.
Kraft Heinz (NASDAQ:KHC) is one example. It has a 4.87% dividend yield, so investors like me could end up with a 4.13% annual passive income after taking off the withholding tax.
The stock has had a tough few years and it’s not hard to see why. Sales growth has been largely non-existent since 2019, which has resulted in the shares underperforming the S&P 500.
There are also ongoing challenges – most notably the rise of anti-obesity drugs. But I think there are also a lot of reasons to be positive.
A stock on the up?
One of the reasons Kraft Heinz has struggled over the last five years has been the debt on its balance sheet. Interest payments have weighed on margins and profits, but things have been improving. Since 2020, long-term debt’s gone from around $28bn to just over $19bn. And interest payments have fallen from $1.35bn to $843m a year.
With its balance sheet in a stronger position, Kraft Heinz has turned its attention to share buybacks. Since 2023, the company has been spending around $1bn on reducing its outstanding share count.
This should help the durability of the dividend – fewer shares outstanding means less cash is needed to maintain the current distribution. And this helps reduce the overall risk for investors.
Should I be buying?
The withholding tax means UK dividend investors need to find better businesses with higher yields to justify buying. And despite the recent drop, I think it’s still the other way around.
In my view, a lot of investors are overlooking the recent improvements at Kraft Heinz. But I still think – for now, anyway – I can find more attractive dividend stocks in the UK.
