UK Investors Are Swamped With Dividend Income. US Investors Could Be Next

I view the UK vote to leave the European Union (Brexit) positively. I prefer decentralization to centralization and local sovereignty to international sovereignty.

This isn’t to say the UK’s transition out of the EU will be painless. Economic uncertainty and market convulsions will persist longer than most investors will like. But as the Persian poets told us centuries ago, this, too, shall pass.

The UK currency, the British pound, has certainly experienced its share of immediate convulsions and pain. This time last year, £1 would buy you $1.56. Today, the same £1 will get you only $1.31. The day after the Brexit vote results were announced, the British pound lost 11% of its value vis-a-vis the US dollar. The intensity of the loss was rare among the world’s major currencies.

Dividend Income Bonanza

But there is a lining of silver to the UK’s dark cloud of currency devaluation: a record payout of dividend income for UK investors.

The UK Telegraph reports that 40% of UK-listed companies run their finances in US dollars. The devalued pound makes it more attractive for these UK-based companies that conduct business in dollars to convert the dollars to pounds and then repatriate them. The devalued pound means they can pay more dividends in pounds with the same amount of dollars.

Many UK investors have benefited from the devalued pound and dividend income. They are expected to take home a record £82.5 billion in dividends in 2016. In the last quarter alone, dividends hit a record of £28.8 billion.

Much of this dividend bonanza comes as special dividends. Capita Asset Services, a London-based advisory firm, reports that special dividend payments quadrupled compared to the same quarter last year. More special dividends are in store.

Lesson for US Investors

This is all well-and-good for UK investors, but there is a lesson US investors can learn: They, too, could experience a dividend bonanza if the right circumstances unfold. For UK investors, a devalued pound was the right circumstance. A change in corporate income tax rates would be the right circumstance for US investors.

The top 50 US companies hold an estimated $1.4 trillion worth of cash offshore, according to Oxfam America. The companies aren’t hoarding cash offshore in anticipation of a better exchange rate, like their UK counterparts. They’re waiting for a better tax rate. The US government taxes repatriated cash at a 35% tax rate. That’s a much higher rate than many companies currently pay.

Both US presidential candidates have talked taxes while on the campaign trail. Donald Trump would like to see the US corporate income tax rate reduced to 15% from 35%. Trump would also like a one-time tax holiday on repatriated corporate income. Trump would like to see the repatriated cash taxed at a 10% rate during the holiday.

As for Hillary Clinton, she has been more evasive on tax details. She hasn’t called for a temporary tax holiday to entice US companies with foreign companies to repatriate their foreign earnings. That said, while in the Senate, she voted in favor of the 2004 American Jobs Creation Act, which had a provision for a repatriation tax holiday.

Of course, a president can only present his tax ideas to the House of Representatives, which is responsible for originating tax legislation. That said, the House is expected to retain a Republican majority, which could prove to be a boon for US dividend investors should Trump claim the White House.

But don’t count out Clinton. She has many corporate supporters, particularly in finance and technology. (Five tech companies alone hold over $500 billion in cash overseas.) Should she claim the White House, she could be amenable to tossing her supporters a bone by supporting a repatriation tax holiday.

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Published by Wyatt Investment Research at