How does your Broker's Foreign Exchange Charge affect your Yield?

NB: I have included a little present at the end of this post. Don't get too excited! It is just a little downloadable spreadsheet at the so you can work out the effect on your investments yourself.

I have been contemplating investing in some foreign (chiefly US) equities for some time now.

I have not yet as I think they are far too expensive currently. In the long run I expect to slowly but surely pull in a couple of US companies (such as Procter & Gamble, Johnson & Johnson, and maybe General Electric) into my portfolio.

However, of course, this incurs further costs in UK brokerage accounts. The prevailing foreign exchange rate, of course, impacts on this significantly. Whether or not the dollar or pound is stronger can--in some cases--seriously affect your return.

However, that is not something that purely affects foreign listed companies. Several of my London-listed companies also report in US dollar (the commodity giants BP, BHP Billiton and Royal Dutch Shell come to mind).

It is also not the focus of this post! The actual subject is an additional cost connected with foreign equities: the foreign exchange conversion charge.

In other words, an additional charge for undertaking the conversion of currencies. This is usually levied on dividend conversion as well as purchases/sales.


As a result, thinking about this has more immediate relevance. This is because there is the prospect of some shares of the New York-listed XL Group joining my portfolio after their prospective purchase of Catlin.

So I need to think about the effect of this additional charge on my dividend yield from XL Group. Does it make it worth holding or not?

Broker-specific Foreign Exchange Conversion Charge

Many UK brokers do not allow for foreign currency deposits to sit in your account. As a result, when you receive a dividend in US dollars they must be converted to British pounds to enter your account.

On top of the impact of the currency fluctuations you are also, therefore, hit by the additional charge for doing so. In my brokers case, this is 1.5%.

Now, currency exchange fluctuations you cannot really factor in easily. They change constantly and--over the long run--you will probably find that the periods of strength and weakness in the currency exchange rates will by and large even one another out.

However, this additional charge cannot be evened out. As a result, it is a predictable and important impact on your dividend returns.

But how much of an impact does it has on your dividend returns? If it is a little maybe you will consider it a cost worth bearing. However, if it is large maybe you would think about another company.

Here's One I did Earlier

I have therefore knocked together a little spreadsheet to work out the impact on my real yield that my brokers charge would incur.

Here is an example I have put together for Procter & Gamble at its current share price and predicted dividend for next year.

Share Price	Pre-FX Charge		Post-FX Charge
	Dividend	Yield	FX Charge (%)	Dividend	Yield
82.66	2.6	3.15%	1.5	2.561	3.10%

In this case, the charge pulls the pure yield of 3.15% down to a realised yield of 3.1%.

In real terms, what impact does this have on my income? Well, lets say I have 15 shares in P&G this is what it would look like:

Share Price	Pre-FX Charge		Post-FX Charge
	Dividend	Yield	FX Charge (%)	Dividend	Yield
82.66	2.6	3.15%	1.5	2.561	3.10%
Shares	Pure Income			Real Income
15	$39.00			$38.42

That loss of $0.58 per year I may consider an acceptable cost for the chance to invest in a company whose fundamentals and business I consider truly worthwhile investing in. Or it may not. 

Obviously, if I was planning to invest more heavily in non-UK stocks this sort of fee would really begin to add up over time. I would therefore look for ways around incurring this charge (I sense a future post brewing...).

However, for an occasional dipper into US equities I consider that a not too crippling charge. Although, you can get far cheaper rates (and indeed higher ones) around!

Now It's Your Turn

Of course, my personal circumstances and interests probably don't overlap with yours. P&G may not interest you. Your broker may charge a higher or lower amount. You may have a holding of 300 shares rather than 15.

If any of the above apply to you I have made my little spreadsheet accessible to you. So, if you want to work it out for yourself feel free using this link to a Google Docs spreadsheet.

You can make a copy to your Google account if you like. Or download as an Excel file or several other spreadsheet programmes and play with it yourself.

A quick note on how to use it. The blue cells are ones which you will need to adjust according to your particular circumstances. Then, let the rest do its mini magic!

[Creative Commons image reproduced from Flickr user Images Money]

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