Dividends are often promoted as a source of steady cash flow, but for digital nomads and other globally mobile investors the strategy carries hidden tax costs and limited performance benefits.
Dividends typically yield only 1‑4 % per year and are paid on top of the stock’s price. Research shows that dividend payouts do not boost overall returns; the price appreciation of the underlying share drives most of the gain. In a down market a dividend can soften a loss, but over the long term the dividend’s contribution is usually absorbed into the stock price, leaving the investor no better off than if they had focused solely on capital growth.
Tax considerations for non‑U.S. residents
- U.S. withholding tax: The United States imposes a 30 % withholding tax on dividends paid to foreign investors. Tax treaties can lower this rate to as little as 5 % but more commonly to 10‑15 %.
- Local dividend taxes: Some jurisdictions, such as Portugal under the NHR regime, do not tax dividends at all. However, the U.S. withholding still applies, so a Portuguese resident buying U.S. stocks would effectively pay the treaty rate (e.g., 10 %).
- Countries with no dividend tax on foreign accounts: Thailand, for example, may not tax dividends received in a foreign bank account, but the U.S. withholding still reduces the net payout.
Because capital gains are not subject to U.S. withholding, selling shares can generate cash flow without the dividend tax drag. This makes a growth‑oriented portfolio more tax‑efficient for most expatriates.
Generating cash flow without dividends
- Sell small portions of appreciated shares: Realising gains provides cash while preserving the bulk of the investment.
- Margin loans: Brokers such as Interactive Brokers offer low‑cost financing (around 0.75 % interest). Borrowing against a portfolio can supply liquidity without triggering dividend taxes, and the interest expense is often tax‑deductible.
When dividend investing may still make sense
- Short‑term horizons – If the investment period is brief, the immediate cash from dividends can outweigh the tax cost.
- Low or zero withholding jurisdictions – Investing in stocks where the source country’s withholding tax is minimal (or eliminated by treaty) reduces the net tax burden.
- Specific treaty scenarios – For example, a U.S. citizen residing in Portugal may face a lower U.S. dividend tax (under the treaty) than Portugal’s own tax on capital gains, making dividends relatively attractive. The opposite may hold for non‑U.S. citizens in the same country.
Bottom line
For most globally mobile investors, dividend‑focused strategies are suboptimal because:
- The modest yield rarely adds meaningful return.
- Foreign withholding taxes erode the cash flow.
- Capital gains can be harvested at any time without withholding, offering a cleaner path to liquidity.
Prioritising growth stocks, managing capital gains, and using low‑cost financing tools generally provide a more tax‑efficient and flexible approach to building wealth while living abroad.
