Should Dividend Investors Look Beyond Total SA?

At 4.9%, the French company Total SA  (NYSE: TOT  )  sports one of the best dividend yields of any of the Big Oil companies, making it a very intriguing opportunity for dividend investors. There's just one problem: Total is an ADR and comes with foreign withholding taxes that can wipe out a fair bit of those dividend gains over time. Let's take a closer look.

ADR refresher
An American Depositary Receipt, or ADR, is a certificate issued by an American bank that represents a certain number of shares of foreign stock. From the individual investor's perspective, buying and selling ADRs happens the exact same way we buy and sell regular stocks.

When it comes to paying dividends, however, ADRs carry one important caveat: They are subject to withholding taxes in their home country. Tax rates can range from 0% to 35%, depending on the country, and it's crucial for investors to understand how that can impact their returns.

What this means for Total
To get a feel for the effects of foreign withholding we'll consider a full-year of Total's price and dividend performance. Here's the company's story from 2013:

Source: Yahoo! Finance

Its price climbed 16.5% from January through December, or $8.70 per share, while dividends paid through the year totaled $3.179 per share. The total return, then, was about 22.5%. Now let's factor in foreign withholding.

France's withholding rate on dividends paid to U.S. ADR holders is 30%. Remember, France will tax these dividends before they even reach your brokerage account. Applied to shares of Total in 2013, the total dividend payout factoring in withholding is $2.225, dropping the total return from 22.5% to 20.7%.

That might not seem like a big difference, but remember that's for just one share over the course of one year. That difference will be magnified if you hold many shares over the course of many years. Ultimately the biggest loss is the one that happens over time, through the power of compounding.

Let's look at what would happen if we took the dividends from 100 shares of Total, compounded annually at the historic market rate of 6.5%, over the course of 25 years.

Year Dividend Post-Withholding
1 $317.90 $222.50
5 $408.97 $286.24
10 $560.32 $392.17
15 $767.68 $537.31
20 $1,051.80 $736.16
25 $1,441.06 $1,008.60

Source: Author's calculations.

Again, the difference in one share is a few cents, but when you look at more realistic numbers, a few cents quickly turns into hundreds of dollars over time.  

Come back, money!
There is one way to potentially recoup at least a portion of these losses. Investors can file for a foreign tax credit when they do their taxes every year. That said, this only covers up to 15% of foreign withholding, and only if the ADRs are held in a taxable account. If your shares are in a tax-deferred account like an IRA then that money is gone forever.

All of this isn't to say that foreign companies like Total are not worth owning. Its dividend after taxes may still be better than another stock you are considering, and it may still outperform other dividend stocks -- that 16.5% rise in stock price is obviously worth something. Rather, the real danger is in buying a stock like Total as part of an overarching dividend strategy, not realizing that its true yield may be hampered by foreign taxes.

Uncle Sam's lucrative upside
While foreign energy companies come with special taxes, some American energy companies are avoiding that nasty problem all together. As we hit near-record levels of oil and gas production and historic amounts of capital expenditures flood our energy industry, some companies are making a killing -- and passing it straight on to investors. The Motley Fool is offering a look at three such energy companies that are using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 28, 2014, at 12:06 PM, ManasotaKey wrote:

    ** The article failed to mention a key point **

    Most brokerage houses worth their salt (e.g. TD Ameritrade) will file form 5000-EN (for future dividends) in which case the withholding rate is only 15% (NOT 30%). You can then apply the 15% withheld by France (it's in your 1099) to your US tax return and end up with the same 15% qualified dividend tax rate on a US equity.

    If you were somehow withheld at the 30% rate on some past dividends, you could file a 5001-EN (for dividends already paid) with the French tax authorities and get a refund.

  • Report this Comment On April 30, 2014, at 10:31 AM, MiserblOF wrote:

    A lot of people who hold this stock are retirees like myself who pay 0% on qualified dividends and get the full 15% back on the withholding. If, perchance, I do lose a few bucks to French taxes, I can enjoy the fact that most of their taxes go to the betterment of the people, and not a global war machine, that French workers enjoy a level of labor law that Americans will never see, and that Total is one of the few big oil companies putting a lot of money into solar and wind power.

    Of course, there is the issue of whether or not to be holding oil stocks at all for responsibility reasons. That is something I thought about, and decided that, while oil companies are certainly not the most responsible companies on the planet, my small investment isn't going to effect the overall outcomes. In addition, since I favor strong and sensible environmental regulation of oil companies, it's a positive thing to make the point that oil companies CAN make money and stop killing the planet at the same time.

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