To date, I had prepared case studies focusing on dividend stocks listed mostly in Malaysia, Singapore, and Hong Kong at DividendVault.com. So, the big question is: ‘What about US stocks?’. Do they have a place at DividendVault.com and in a dividend-based stock portfolio?
Here, I’ll pen down 5 main factors that you like to consider before investing into your first US stock. They are as follow:
Factor #1: Are US Stocks for Newbies?
Is it necessary for one to invest locally first before getting into US stocks?
Well, I wouldn’t say it is necessary. But, if you have already built yourself a good portfolio filled with locally-listed dividend stocks, I believe you can transfer your mindset, skill sets, experiences and emotional strength into building yourself an awesome US-based stock portfolio.
Many people ask, ‘Which of the two is better: local stocks or US stocks?’
But for me, I think there is a question which precedes the above question and it is: ‘Are you a good stock investor?’. Now, here is the rationale. If let’s say, you’re a good stock investor, you could do well in both local and US markets. However, if you are not a good stock investor, it is likely that you would incur losses in any markets that you invest in, be it the local market or the US market.
So, what works is not the ‘markets’.
It is the investor. If your mindset is good, your skills are sharp and you have a system in investing, I would say your chances of success would be high in any markets that you wish to invest in.
Factor #2: Do I Need Better Investing Skills to Invest in US Stocks?
I rely on two skills to build my stock portfolio: accounting and valuation.
To some extent, the answer is no. There are US stocks which have the ‘simplest’ financial reports to interpret. They are super ‘clean’ and are perfect for newbies to learn the art of interpreting financial reports and do simple stock valuation.
However, there are stocks that are ideal for investors who have a higher level of accounting and stock valuation skills. For instance, they could be fundamentally good stocks that are delivering growth in revenue and gross profits but will only ‘choose’ to report either low net profits or small net losses year-after-year.
Why? This is because these stocks:
– Prefer to increase marketing and R&D expenses to grow their businesses.
– Prefer to not report high profits, which subject them to higher corporate tax.
So, in this case, how do you value these stocks when their actual stock earnings are much lower than their genuine ability to generate business profits? If today, you don’t know, it’s okay. It just means that you are not ready to invest in them.
Factor #3: 30% Withholding Tax on Dividends from US Stocks
Because of this, it is tax-efficient to invest for dividends in the Asian markets, be it the Malaysian market, the Singapore market, and the Hong Kong market.
Investors should be more growth-orientated when investing in US stocks.
Let me explain:
Supposedly, we have A Inc., a US stock. A Inc. is capable of earning US$ 1 billion a year from its businesses. A Inc. could choose to do the following:
A Inc could report the full US$ 1 billion per year in earnings and subject itself to corporate taxes. Upon settlement of corporate taxes, it could pay out dividends to reward its shareholders (investors). As a shareholder, you would collect a net dividend after a 30% withholding tax. This is known as ‘Double Taxing’.
A Inc may reinvest the bulk of its US$ 1 billion into several R&D projects, or into expanding its reach into the US market, or improve on its current logistics … etc and these shall be its operating expenses, which lower A Inc’s profits before tax (PBT) figures and thus, reducing its corporate taxes. Since it has lesser earnings, it has no intention of paying dividends and chooses to reinvest whatever profits back into building its businesses.
If you are a shareholder of A Inc, which of the two options do you prefer?
Factor #4: Can You Stomach Bigger Stock Volatility?
The US stock market comprises tens or hundreds of millions of participants that buy, hold, and sell securities each weekday around the world. They may include investors such as Warren Buffett to common folks who are into Wall Street Bets (WSB). This means we have millions of people who will buy, hold and sell stocks based on their own logic, reasoning, emotions, … etc.
This is why it is hard to predict where the market is heading in the short-term.
Worst still, not all participants buy, hold, and sell stocks solely on cash.
Many will use leverage of all sorts: CFDs, options, share margin financing (SMF), and so on and so forth to leverage on their stock positions with fewer cash. This would cause stocks to rise up very quickly and also stocks to go down as quickly as they came up. So, leverage would cause stock prices to be more volatile. The question is, ‘Can you stomach these volatilities?’
Factor #5: Affordability
There is no minimum amount of shares to buy for a US-listed stock. However, in practise, one should have a higher earnings power to invest in US-listed stocks.
Today, many stocks are priced way above US$ 100 per share. Thus, if you intend to invest 10 shares, it may cost you RM 5,000-RM 10,000 to buy these shares. If the stock you wish to invest in is priced at US$ 1,000 or more, then, it obviously would cost you much more and you would need more capital to invest in it.
Conclusion: Are You Ready for US Stocks?
I believe you are more ready for US stocks if you:
#1: Have some successes in building up a portfolio filled with local stocks.
#2: Have adequate accounting and stock valuation skills.
#3: Have a deep interest in the business models of these US stocks.
#4: Have a strong stomach as US stocks can be volatile due to leverage.
#5: Have a sizable capital to start with or have strong earnings power.
Otherwise, it is okay.
You could still build a successful portfolio with stocks that are listed in Malaysia, Singapore and Hong Kong.
Alright, that is it for this week.
If you have any questions / feedback, please post them to firstname.lastname@example.org.
Stay tuned for my latest next week.