Dollar income: 3 ways to receive dividends in American currency

Investments that pay a periodic income are popular among individual investors. And, in a world where ordinary investors have increasing access to global markets, these returns do not need to be restricted to the local currency. Get a income in dollars became possible.

In the world of variable income, those who take on the role of income-generating investment are usually good dividend-paying stocks, often called “cash cows”.

To receive dividends in dollars, therefore, Brazilian investors can invest in foreign cash cows. You can do this directly by purchasing the actions on foreign stock exchanges, or through investment in BDRs (Brazilian Depositary Receipts) or ETFs (Exchange Traded Funds) foreigners.

BDRs are receipts for shares listed on exchanges in other countries, traded on B3 as if they were Brazilian shares; ETFs, also called index funds, are investment funds with exchange-traded shares that seek to follow the composition and performance of some market index – for example, an index of shares that historically pay good dividends.

Next, we will analyze each of these ways of investing:

3 ways to receive dollar income

1. Stocks that pay good dividends

The first way to invest in order to receive income in dollars is through the direct purchase of foreign shares that pay good dividends. And the simplest way to do this is by opening an account with a brokerage that offers investment to Brazilians on American stock exchanges.

These financial institutions have greatly facilitated Brazilian individuals’ access to international markets, reducing bureaucracy and language obstacles to investing abroad.

The best-known brokerage is Avenue, currently linked to Itaú, but other financial institutions already offer this possibility to their customers, such as Inter, XP, C6 Bank and Bradesco. The Nomad dollar account also has the service.

To invest with an eye on income in dollars, the ideal is to choose a brokerage that does not cover brokerage, custody, maintenance or inactivity fees, in addition to offering an advantageous exchange rate spread (currency conversion cost). Remember that, to invest abroad, foreign exchange operations are also subject to an IOF of 0.38%.

In this other report, we talk about the advantages and disadvantages of the seven main accounts for investing abroad available today in the Brazilian market and we indicate the best ones for investing in shares.

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2. ETFs that pay dividends

Unlike Brazilian ETFs – which only recently began to be able to distribute dividends – foreign ETFs can pay dividends.

ETFs are funds that invest in assets in order to replicate the composition of a market index and, therefore, have a performance equivalent to that of the index. Thus, ETFs that mirror stock indices can distribute the dividends paid by those stocks.

In the United States, as here, there are stock indices focused on companies that pay good dividends, which results in a wide variety of ETFs of this nature.

Investing in foreign ETFs is done in the same way as direct investment in shares abroad, as their shares are traded on the stock exchange, as if they were shares. Costs also tend to be similar.

Therefore, simply open an account with a broker to invest abroad, based on the same criteria for investing in shares, and purchase ETFs through the institution’s platform.

3. Stock BDRs that pay good dividends

The third option for the Brazilian investor to obtain income in dollars is to invest in BDRs of foreign companies that pay good dividends. After all, if the company whose shares back the BDR distributes dividends, the holders of that BDR also receive them.

This is a more practical way to invest in shares abroad, as BDRs are the representatives of these shares on the Brazilian stock exchange. Therefore, as they are receipts backed by these shares, the entire procedure for investing in BDRs is identical to the procedure for investing in shares listed on B3.

In other words, there is no need to carry out an exchange transaction, converting your reais into dollars, nor operate through foreign brokers or accounts for Brazilians to invest abroad.

It is possible to invest in BDRs through the home broker of the same Brazilian brokerage that you use to buy and sell domestic shares.

The costs are also the same, which means that it is very easy to invest with zero fees, since several local brokers nowadays already exempt their clients from brokerage and custody fees to operate on the stock exchange. You would only have to pay the mandatory fees to B3, which there is no way to escape.

BDRs, however, have some disadvantages. The first is the smaller variety of companies available compared to direct investment out there. At brokers to invest abroad you have access to all shares traded on American exchanges, but not all of them have BDRs traded on B3, for example.

The second is that the custodians – financial institutions in the company’s country of origin that hold the shares in which the BDR is backed – retain between 3% and 5% of the dividends distributed.

How to invest in BDRs? See the best way to expose yourself to the dollar with international stocks

What are the stocks and ETFs that pay good dividends in dollars?

Investing with a focus on dividends in dollars is different from investing in Brazilian “cash cows”. In other countries, such as the United States, companies may not be required to distribute dividends, as is the case in Brazil.

Therefore, it is important to check whether the payment of earnings regularly is a company practice, whether there is a specific policy for distribution and whether this has been consistent over time.

Furthermore, as in Brazil, the frequency of distribution of earnings varies from one company to another, and may be monthly, quarterly, semi-annual or annual.

And who are the US “cash cow” companies? As an example, we can mention the companies that are part of the main index of dividend payers on American stock exchanges: the S&P 500 Dividend Aristocrats, which measures the performance of companies in the S&P 500 (main American stock index) that have increased their dividends annually over the last 25 years.

The index currently consists of 67 stocks of American companies, and the top 10 by weight in the index today are: Exxon Mobil, AFLAC, Caterpillar, Emerson Electric, Chevron, AbbVie, Chubb, General Dynamics, IBM and ADP. See the full list here.

There is also another concept used in the American market, that of Dividend Kings, which are companies that have increased their dividend payments for at least 50 consecutive years. Companies such as Procter&Gamble, 3M, Coca-Cola and Johnson&Johnson join this list in 2023.

As for ETFs, in the American market there are 165 dividend-paying ETFs, 66 of which are focused on assets with high dividend yield (dividend return). An ETF that tracks the S&P 500 Dividend Aristocrats Index, for example, is the ProShares S&P 500 Dividend Aristocrats (NOBL).

The largest dividend-paying ETF in the US is Vanguard Dividend Appreciation (VIG), with assets of more than US$65 billion, whose scope is the US market as a whole. Next come Schwab US Dividend Equity (SCHD) and Vanguard High Dividend Yield (VYM), with assets of around US$46 billion each, focused only on stocks with a high dividend yield.

Which good dividend-paying shares, BDRs or ETFs to buy?

So that the investor knows which shares or ETFs to buy in order to obtain income in dollars, some brokers with accounts to invest abroad already work with advisory or recommendation reports for these clients.

C6 Bank, for example, offers investment advice to customers of its Global Invest account. Avenue and Inter Invest, from Banco Inter, publish reports with the assets recommended by their analysis teams. Avenue even gives specific recommendations for dividends, even ETFs.

BDR recommendations, in turn, have become increasingly common among Brazilian brokers. Some publish reports with recommended portfolios of BDRs specifically, while others integrate BDRs into their general recommended portfolios, mixing local and foreign assets.

Income tax: dividends abroad are taxed!

Now it’s worth talking a little about the taxation of investments abroad. Unlike what happens with dividends distributed by Brazilian companies – which are exempt from income tax, at least for now – dividends paid by foreign shares and ETFs, as well as BDRs, can be taxed in the country of origin. In the USA, for example, the rate is 30%, and the tax is withheld at source.

Furthermore, they are also taxed in Brazil, according to the progressive income tax table, whose maximum rate is 27.5%, and the tax must be collected by the investor himself when the funds are received.

Progressive IR table valid from May 2023

The good thing is that, in the case of countries that have a non-double taxation agreement with Brazil, such as the USA, it is possible to offset the tax paid abroad from the tax to be charged here.

In addition, the profitable sale of shares, ETFs and BDRs is also taxed. In the case of BDRs, the tax collection and the way of declaring it are similar to what happens with shares traded on B3: the rates are the same (15% or 20%, depending on the type of transaction) and it is possible to offset losses , although there is no exemption for negotiated amounts of up to R$20,000 per month.

In the case of shares and ETFs traded abroad, sales are considered negotiations of movable assets, and the profit earned is classified as capital gain, being subject to taxation that varies from 15% to 22.5% depending on the profit value. There is no compensation for losses, but income tax exemption for small-value goods is valid for negotiated amounts of up to R$35,000 per month.

I talk more about how to collect and declare income tax on income abroad, including dividends in dollars, in this other report; In this article about how to declare BDRs in income tax, I also talk about how tax compensation on dividends is carried out in order to avoid double taxation.