God Save The King: How to Avoid Withholding Taxes and Earn Tax-Free Dividends Like a Pro
Withholding taxes are a bane for dividend stockholders.
For the uninitiated, withholding taxes are levied on non-residents who earn income from a foreign country. This applies to interests, dividends and royalties.
For example, if you live in Singapore and invest in primarily U.S. stocks — you face an incredibly high withholding tax rate of 30% on dividends.
This situation obviously isn’t very ideal as taxes can add up to quite a bit.
So how do we maximize our dividends? We find a legal way to game this loophole.
How do we avoid withholding taxes?
Not all withholding taxes — or dividend stocks — are equal.
Some countries, like Singapore, have a 0% withholding tax rate. However, their stocks often come with trade-offs, such as low growth prospects, weak fundamentals, or low dividend yields.
Singapore’s stocks comprises of mostly small cap stocks (<2B) — whose float can be easily manipulated. Also, many have missing P/FCF ratios, which indicate that these companies may be losing money. Growth prospects are also low — as indicated by missing Fwd P/E and PEG ratios.
The only dividend stock I would consider investing in from Singapore is HAFN — IF it drops to the support level of $4.50.
With a P/FCF of 2.92, a market cap of $2.62 billion, an attractive P/E ratio of 3.01, and an average quarterly dividend payout of 6%, I think this makes this stock a great buy for long-term dividends.
Editor’s note: Why is P/FCF such a great indicator of growth?
Free cash flow (FCF) represents the real money a company has left after deducting expenses and capital expenditures (CapEx). Imagine the company being like ole’ Huell up there lying on a bed of cash.Companies with high FCF can reinvest in growth strategies such as R&D, acquisitions, and market expansion. Also, FCF is a far more reliable metric than earnings (used in P/E ratios) since it is harder to manipulate in financial reports.
Which other countries have 0% withholding taxes?
If you look at this document compiled by PWC, you’ll find a list of countries and territories with 0% withholding taxes.
Brazil
Cyprus
Estonia
Hong Kong
Hungary
Kuwait
Latvia
Malaysia
Malta
Mauritius
Myanmar
Oman
Qatar
Saint Lucia
Singapore
United Arab Emirates
United Kingdom
Vietnam
Our Dividend Stock Strategy — Important!
With this knowledge, we can’t just buy any high-dividend stock from withholding tax-free countries. Many industries, such as marine shipping, oil & gas, REITs, and high-risk ETFs, may offer high dividends — but often at unsustainable rates.
These companies may have high capital burn rates and, in some cases, may operate similarly to Ponzi schemes — using funds collected from A to pay B.
Hence, we want to buy sustainable stocks with strong cash flows that are currently oversold.
Here’s our strategy:
- Find a dividend stock in a withholding tax-free country
- Analyze fundamentals, growth prospects, and dividend history
- Identify a strong support level to buy at
Step 1: Find a dividend stock in a withholding tax-free country
Use FinViz’s stock screener to select your preferred withholding tax-free country and filter for stocks with a positive dividend yield.
Brazil — 26 stocks
Cyprus — 1 stock
Hong Kong — 6 stocks
Singapore — 7 stocks
United Kingdom — 42 stocks
These stocks are all listed on the NYSE/NASDAQ.
Step 2a: Analyze stock fundamentals and growth prospects
Let’s filter out dividend stocks from the UK, for example.
Our requirements:
- Mid-cap stock: > $2B market cap to mitigate price manipulation
- High cashflow: P/FCF ratio <15 (the lower the better) to ensure that stock has sufficient cashflow to pay out dividends
- Oversold stock (optional): Try to buy stocks with a RSI value < 40 to minimize downside risk (the lower the better)
- Cheap stock (optional): I prefer stocks priced between $10 and $50 as this allows me to better diversify my capital and sell put options without using too much margin.
Let’s flip to valuation ratios.
From here, I like what I see — circled in red. Low P/FCF indicates healthy cash flow relative to the stock price, a low P/E suggests great earnings, and a low P/B represents great valuation.
Here are the best dividend stocks in the UK — in my opinion — based on their current valuations:
- Vodafone (VOD) — 5.59%
- Shell (SHEL) — 4.26%
- BP (BP) — 5.87%
- International Game Technology (IGT) — 4.75%
- British American Tobacco (BTI) — 7.54%
Step 2b: Analyze dividend history — regularity of payouts
Most dividend stocks in the UK give quarterly payouts. However, some pay a set amount (i.e. BP) while some fluctuate (i.e. VOD) or may even miss payments (i.e., VALE — a Brazilian stock). These factors should be taken into consideration when buying dividend stocks.
Remember: Dividend yield uses trailing twelve months (TTM). For quarterly payouts, divide the annual yield by 4 to calculate the payout per quarter.
Hence, BP's quarterly payout will be 6.1% / 4 = 1.52% per quarter.
Step 3: Identify a strong support level to buy at
The ideal scenario is always to buy low, sell high (not the other way round). Hence, we want stocks that are approaching oversold levels (RSI < 30).
VOD bounced off the $8 line three times, indicating a strong psychological support level.
Also, remember that with dividend stocks, the best time to buy is a month before the ex-dividend date. Stock prices tend to rise leading up to the ex-dividend date and fall afterward.
Investors who purchase stock before the ex-dividend date are entitled to the next dividend payment while those who purchase stock on or after the ex-dividend date are not.
Case study: Falling knife situation
Let’s study the case of IGT. On paper, we have a consolidation at $17 — representing a strong support line. However, there is a chance of this line breaking and falling to the next support of $15 before rebounding.
If the $15 support fails, the stock may drop to the next key support level at $12.50. In situations like this, risk management is crucial — don’t put all your eggs in one basket.
Always ensure you have enough capital on hand to average down if necessary.
However, this stock is likely to bounce back due to its strong fundamentals and growth prospects — as listed out in our first step.
Why the United Kingdom?
In my opinion, the UK and Brazil are both great countries for dividend stocks.
However, for one when it comes to reliability, UK stocks are typically more consistent in paying their quarterly or annual dividends.
While Brazilian dividend yields may seem more attractive, it could also be a result of falling stock prices (since yield = dividend / price).
Also, political and microeconomic factors in Brazil tend to be more unstable compared to the UK, which can lead to larger price swings and drops.
Conclusion
When buying dividend stocks, take note of the country it is listed in as withholding taxes can eat away at your income.
Most dividend-paying stocks are also not typically known for their strong growth, so to maximize your value — only invest in oversold stocks with solid fundamentals and growth prospects.
Happy investing!
=
This article was written and published on 1/31/2025. Please do your due diligence before buying stocks — money is precious and your own hard-earned savings. This article does not constitute as financial advice.
Follow me on Instagram @Wavystonks!
I’m trying to build my portfolio as a finance writer, and I’d appreciate if you could follow my Instagram account @wavystonks, where I analyze and suss out which stocks are the best to buy according to financial ratios and trends. See you there!