One new buy and a potential big headwind

One new purchase: more Diageo shares
I started August with the purchase of ten more Diageo ADR shares,  this increases my annual dividend income by £17.29 (20.66EUR). Diageo is now the second-largest position in my dividend portfolio, it’s one of world’s largest spirits makers with popular brands like Johnnie Walker, Smirnoff, Captain Morgan, Baileys Tanqueray, etc.

Ceteris paribus, I expect to receive after-taxes dividend income in excess of 1286EUR in 2017.This does not take into account future purchases or expected dividend increases.

tanqueray_tonightwetanqueray211

Is there trouble on the horizon for Belgian dividend investors?
Will dividend investing still be worth it in the future? It’s one of the questions I asked myself when I read a newspaper article last week about a proposal to dramatically increase dividend tax to enable the Belgian government to lower the corporate tax.

Dividend taxation in Belgium is already quite high, we pay 27 percent tax and there are no exemptions or tax credits. What makes it even worse is that most foreign dividends are double-taxed, dividends from US companies for instance get taxed 15 percent in the US plus another 27 percent in Belgium, resulting in a total tax rate of 37.95 percent.

Dividend taxation in Belgium used to be lower but recent governments have steadily increased the base rate, while also eliminating certain more favorable rates, in effort to raise more taxes. More taxation is on the horizon as our government is constantly in need of more money to balance the budget, but there are also plans to reduce the base rate of the corporate tax. The latter seems good on the surface but unfortunately it could be pretty bad for me.

While Belgium has a high corporate tax rate of 33.99 percent, the effective tax rate can be a lot lower due to measures like the notional interest deduction, the latter saves companies billions in taxes. Some politicians hope to reduce the base rate to 25 percent or even to 20 percent but this is going to require a lot of money. The High Council of Finance calculated that lowering the corporate tax rate to these levels would require the elimination of the notional interest deduction as well as much higher dividend taxation.

So what kind of rates are we talking about? A recent article in De Tijd explained dividend taxation would have to increase to 34 percent or perhaps even as much as 38 percent! Should this come to pass, I would have to reconsider my dividend investing strategy, especially because my portfolio contains mostly foreign companies.

It could be just a false alarm, but I’m afraid taxation is a potentially big headwind.

Finished a book: Dream Big
I finally finished reading Dream Big, a book that describes the rise to success of Jorge Paulo Lemann, Marcel Telles and Beto Sicupira, aka the Brazilian trio behind 3G capital. It’s an enjoyable story that details where these men came from and how they achieved the seemingly impossible. It goes into detail about how the trio formed their unique partnership and how they developed their remarkable management style that focuses heavily on frugality and meritocracy.

Most of the book deals with how they build up Garantia and transformed companies like Brazilian retail chain Lojas Americanas and beer maker Brahma. One of the reasons I was interested in reading this book was to learn more about how AB InBev became what it is today but unfortunately the book wasn’t as detailed as I hoped.

There’s a lot of information about how AmBev was created via the merger of Brahma and Antarctica, and how Interbrew merged with AmBev to create InBev, but beyond that the brevity of the book was remarkable. Among other things, I was hoping for a lot more information about the creation of AB InBev, as well as details about the improvements they made but in these areas the book is rather light.

Next on the list is One Up On Wall Street by Peter Lynch.

41owl2irtdl

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7 thoughts on “One new buy and a potential big headwind

  1. Pursuit 2 Freedom

    Ouch. That is very bad. In my opinion the taxation rules in Belgium are already very bad for DGI. If they raise the tax even more, than I can understand that you have to reconsider your strategy. But it would be awfull if you have to do that only because governments are not consistent.

    Another question is if there is a good alternative. I understand that you also have some kind of “speculation tax”? If I understand it correctly, than selling within a year is also not interesting. It looks as if the Belgium government wants to discourage private investing completely…

    I hope it won’t happen for you. Good luck with your investments!

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    1. Dividends Are Coming Post author

      Yes, a really silly speculation tax went into effect on January 1st. Basically, you have to pay 33 percent on profits if you keep stocks for less than six months. Losses on other stocks can’t be deducted and there are a bunch of other illogical rules like the fact that currency gains/losses aren’t taken into account. So if a stock trading in USD goes up but you lost money due to unfavorable currency exchange rates, you need to pay speculation tax! The left-wing has been screaming for more taxes on capital but what we got is really little more than a tax on small investors.

      The speculation tax wasn’t supposed to bring in a lot of money, just a meagre 34 million EUR, but most brokers now think the tax is actually costing the government money because people changed their behavior. More people have switched to (sometimes riskier) investments that aren’t covered by the speculation tax and folks are waiting longer to sell. This reduces the number of transactions, which cuts into the tax revenue earned by the 0.27 percent transaction tax. At the same time, the speculation tax has severely cut liquidity in small and micro caps and is hurting the IPO market.

      But as usual, politicians don’t want to admit they’ve made a mistake. On the bright side, the single biggest tax we don’t have in Belgium is a long-term capital gains tax. This could change in the future, the left is screaming for this and resistance from the right seems to be waning as it seems like an easy way to increase tax revenue without having to take unpopular (but necessary) measures.

      The alternative to DGI would be indexing via ETFs that capitalize the dividends. The advantage there is the much lower dividend tax but I’m not sure if this is a strategy I can stick to for the long-term. I really like DGI because of the level of control and granularity, and the thrill of searching/analyzing/buying companies and seeing the dividends roll in.

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      Reply
      1. Pursuit 2 Freedom

        I can imagine. I don’t understand a government that is trying to limit the possibilities for people to take care of their own. Because that is what really happens.

        I’m Dutch and we seem to be quite lucky here. We pay 1,2% tax net for all the liquid money / stocks we own above 22k a person. Since it wouldn’t be fair to pay tax over tax you can deduct all the tax that is paid on dividends from this tax. That means you still pay the “wealth tax” but you actually don’t pay tax over dividends. The only downside is you get the money back once a year only.

        For as far as I know we also don’t have a capital gains tax. Although, for a buy and hold type of investor that wants to live of dividends, a capital gains tax wouldn’t hurt that much I think.

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  2. ambertreeleaves

    The forward looking dividend looks super. We started to drink gin tonic. We could switch to tanquerqay!

    The forward tax in Belgium does indeed really bad. I had dgi as next step for me. It is on hold for now. One can only hope there is a sort of taxfree sum we can make per year. Let’s see how it goes. For now, most of my assets are in accumulating funds and etfs..

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    1. Dividends Are Coming Post author

      Haha nice! I’m not really a gin drinker, my preferred type of spirit is whisky/bourbon but recently Southern Comfort became my favorite. I discovered this drink on a recent holiday and buying a bottle was one of the first things I did when I got home 😉

      Indeed, taxes are a bitch. Before taxes my annual dividend income is around 1828EUR so the average tax rate on my portfolio is around 30 percent with the current portfolio makeup. It’s lower than I expected but it makes sense as most of my big payers aren’t double-taxed.

      The proposal from a couple of years ago to expand the tax-free saving regime to obligations and stocks was nice but it’s been very quiet about this since the formation of the current government.

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  3. JC @ Passive-Income-Pursuit

    I like the purchase but yikes the potential tax increases are scary. The unknown of taxes and healthcare are my biggest concerns with living solely off of our dividends unless we have a huge margin of safety. I fear that it won’t be too much longer before they start rising here although they might not hit the middle class.

    I hate seeing governments that do this especially under the guise of improving things. If they are going to cut taxes in one area they always talk about HAVING to raise somewhere to make up the difference. There’s rarely any real talk about cutting spending which works even better.

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    1. Dividends Are Coming Post author

      Exactly. Tax shift was the main buzzword in Belgium after the last federal election. Instead of finally tackling the massive size of our government the main focus was on trying to better things by shifting taxes around a bit. The next budget talks are going to be interesting again as tax revenues for the first five months of the year were quite a bit lower than projected.

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