An important lesson I learned about reinvesting your dividends in France or anywhere else on this planet: beware of the taxes and social deductions. Don't reinvest dividends unless you know 100% that it is indeed beneficial and will grow your wealth. A few weeks ago I received a message from my broker that Total SA offered the option to be paid dividends in shares rather than euros. A truly great deal for a number of reasons: 1) you increase your shareholding in a company that you believe in and 2) the transaction is free; my broker offers this transaction free of charge (but beware this might be different with your broker). Yet, sometimes things go not as planned.
Option: Reinvesting Dividend
But let me start at the beginning:
At the end of March I received an email from my broker that given the amount of dividends I had received, I was eligible to opt for reinvesting the dividend rather than being paid in cash. This is nothing new or rare. In fact, many companies offer this type of option to keep money within the company and also to increase shareholder dedication to the company. By paying your dividends in shares, the company keeps cash in their accounts and you become, even only slightly (depending on what share of the business you own), a more significant shareholder in the company.
A win-win for both parties when you as a shareholder see great potential in the company. These offers even give you a bit of insight into more advanced trading: the offer is bound to an option. That is, the company offers you the shares at a discount to the current price. But this will only come as a discount if the future price is higher than the option.
Total SA’s offer price at which shareholders were able to buy additional shares through the reinvestment plan (dividends paid as shares instead of cash) was € 36.24. The price for Total SA on the day of the offer, April 4th 2016, was € 39.18. This represents a discount of 7.5%. The option expired on April 12th, or in other words, the delivery date of your new shares. Now, if the price of Total was to either remain stable or go up in the window between the 4th and the 12th, this offer would be a good deal. If the price was to fall below € 36.24, this offer would not be beneficial. This is in fact how options work. One of the most famous and related examples are airline companies. They will buy their kerosene months and years in advance, but not buy an actual commodity, but an option to buy a certain amount on a certain date for a certain price hoping that the price will be in their favor. From a strategic point of view it helps companies to plan ahead and have stability.
So being given this option can be a fantastic deal. It is worth noting that with the volatility in oil price and that in the relevant companies has been quite substantial in recent times and thus opting for the dividend reinvestment was a bit of a gamble, but one I was happy to take ...
An email: No Fees
... Especially after talking to my broker. Something to keep in mind is that some brokers in some jurisdictions might charge you for reinvesting. Thus, if you were offered to reinvest your $/€/£ 20 dividend but had to pay a transaction fee of $/€/£ 5, stay clear of that deal. Even if you were to receive $/€/£ 100, the transaction cost eats up 5%, thus rendering this offer unsuitable. For a quick overview of when it makes sense to reinvest if your broker charged you for the transaction refer to this table.
If you are lucky enough to have a good broker, you don’t have to worry about any unnecessary fees. After speaking to my broker I was reassured that I did not have to endure any fees from their side. I also believed that the oil price had bottomed and Total upward potential. With the discount I was to gain at least 7.5% the day the shares were delivered (as in showing up in my account). Really a no-brainer.
Of course, I also did some research on the taxation of reinvesting and came across a big French finance website that claimed that opting for this type of deal would also exempt me from any taxes. I guess it is time for them to update their information … because …
Reinvesting dividends and a nasty surprise
In France any shareholder has to pay taxes and social deductions on dividends and share gains. The taxation and deductions are indeed very high: a staggering 36.5% (of which 21% are taxes and 15.5% are social deductions). You will thus understand why I looked into this before opting for reinvesting the dividends. According to the finance website I consulted, no such deductions would apply when reinvesting dividends. And while this may have been the case at some point, this no longer is the case. In fact, here in France you are hit with the full amount.
I, however, did not find out until I checked my portfolio. In good belief that the information was true, I happily anticipated a growing portfolio. And while the portfolio did grow, I was rather surprised by a substantial amount of cash being taking out of my cash account.
This is important for anyone investing in France, or for that matter anyone across the globe. Regardless of whether you opt for cash or reinvest your dividends, you are subject to the full amount in deductions if this is the law in your jurisdiction. Some countries or states may allow you to reinvest without having to pay taxes and deductions, others may not be so lenient. And while I still believe that reinvesting in a company is a great deal if the company has potential, be aware of the taxes and social deductions.
Hence, the four things to check before opting for a reinvestment plan:
- Is the price you can buy new shares for under the reinvestment plan beneficial for you (i.e., low enough to make it worthwhile or do you think you can buy shares at an even lower price ex-dividend?
- Does your broker charge you for the transaction?
- Does the government wants it share and if so how much?
- Is the reinvestment plan outsourced and managed by an external organization charging you for the pleasure of reinvesting your money?
Wherever you live, before opting for any financial transaction, check, double-check, and triple-check the small print. It will save you bucks and at least an unpleasant surprise.