Sunday 8 March 2015

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 ChargePost-FX Charge
DividendYieldFX Charge (%)DividendYield
82.662.63.15%1.52.5613.10%

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 ChargePost-FX Charge
DividendYieldFX Charge (%)DividendYield
82.662.63.15%
1.5
2.5613.10%
SharesPure IncomeReal 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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21 comments:

  1. Dividend Drive,

    Pretty awful that your broker charges you for currency conversion. The two brokers I use in Belgium just use the actual conversion rate without any extra commission.

    The impact of a 1.5% commission over the long-run is pretty significant, but wouldn't deter me from investin in foreign equities if no other option was available.

    I hope you get to add PG to your portfolio in the near future!

    Best wishes,
    NMW

    ReplyDelete
    Replies
    1. The commission is quite large. However, it is not the worst in the UK. Undoubtedly for investing in UK stocks it is one of the best and cheapest execution-only brokers around. However, for non-UK companies it is less ideal!

      If the likes of PG get ridiculously cheap I will happily add it even with the fee. Luckily it is not currently urgent. Obviously, the XL matter would make it a little more urgent!

      I am considering other options possibly for the future (on which I will post later). This chiefly revolves around having foreign accounts for trading foreign stocks. This adds a little more risk. However, as I am only interested (really) in investing in US and European companies I know they are well regulated countries. What is more, the proportion of my net worth in these accounts would be limited.

      Which brokers do you use? Do you know if they accept non-resident investors? I've done work on finding US brokers ones which do but had no luck with European ones.

      Thanks for dropping by!

      Delete
  2. I too have opened a foreign account with TradeKing for US, and am considering Lynx for Euro... but can't really justify the Euro one yet, until I have much more to invest. TradeKing makes sense as it's dirt cheap and allows foreign nationals to have an account.

    ReplyDelete
    Replies
    1. That is very interesting. TradeKing was one I did come across in my research into cheap US brokers who accepted UK-based investors. However, I found that it stated that it only accepted those with a US address so I did not include it. Did you find this? Or did you get around it?

      I have never encountered Lynx before. I just had a look. Seems that they do allow UK investors! Will have a better look!

      Delete
  3. well, when I signed up to them you could just put your UK address in there. I didn't have a problem?

    ReplyDelete
    Replies
    1. That is really interesting. I may start a little additional list in my post of US brokers open to UK-residents (still work in progress!) highlighting this.

      I wonder whether anyone else has similar experiences in opening accounts with US brokers?

      Is it the case that, unless they specifically state they do not accept foreign investors, they tend to allow applications to go through without issue?

      Really very interesting!

      Delete
    2. Just found the bit on the TradeKing site. It states: "All customers including US citizens must be living in the USA to maintain a TradeKing account."

      Maybe they introduced this after your application or are just very lax with enforcing it! Almost tempted to give it a try myself!

      Delete
  4. I do think that is the case, yes. If you look at the FAQs or whatever for each foreign broker, the US ones in particular say 'must be a US resident/citizen' etc. I thin the EU ones don't say that much

    ReplyDelete
    Replies
    1. No, most of the EU ones are very quiet. I gather from something that I read on Degiro's site that EU broker's are compelled to be very open. However, this could have been an incorrect impression I have got of that. Would be very interesting to have that confirmed/contradicted!

      Delete
  5. with tradeking, I opened the account several years ago, before they merged with Zecco. So, maybe they have changed the rules since then?

    What are Degiro's fees like, as I found Lynx was one of the cheapest.

    ReplyDelete
    Replies
    1. That could be it, perhaps. Though you would have thought if it mattered to them that much they would go on a foreign account cull! So maybe they still accept non-US based investors. Will have to look into it more. I may be posting the early outcome of my research today. Watch this space!

      They are not bad. I am not really considering DeGiro, to be honest. Lynx does seem better but the high min. account size is a delayer somewhat! However, I have yet to look into the European brokers much more. I will keep you posted!

      Delete
  6. oh btw look at this before you open with degiro - http://www.amsterdamtrader.com/2014/10/9-things-i-hate-about-degiro.html

    ReplyDelete
    Replies
    1. What an excellent and to the point review of DeGiro. Certainly pushes it even further behind Lynx it seems!

      Thanks for this!

      Delete
  7. yes, the account limit put me off too. I can't invest in that many euro countries in my current ISA, so that is why I was looking at Lynx in the first place. I might just keep it simple and try to find the best shares in markets that I can already do trades in. I may as well start with what I've got and then build up from there.

    ReplyDelete
    Replies
    1. I think that is a good idea. It is likely to be what I do to begin with. the only issue there is then what to do if you do open a separate account!

      Thinking of a simplified system. Ideally, I would have a UK account which is pretty solid (though not necessarily spectacular) for international investing and use that. As long as it does not cost anything to hold the companies I will be quite happy to pay a little premium for the transaction itself. I can control that a bit more!

      TD Direct look's quite good in that regard. It also seems that they have a free transfer out policy which seems too good to be true. If so, I may take that direction!

      Delete
  8. that really DOES look too good to be true, you'd wanna make sure you really check the Ts and Cs on that one

    ReplyDelete
    Replies
    1. It is definitely what it says here: http://www.tddirectinvesting.co.uk/rates-and-charges/.

      It does look a nice account. However, £12.50 for the trade is quite high. But, as I say, you can control and factor that in easily!

      What is also exciting, you can hold cash in many currencies without having to exchange it. That is also good. I think over the long term it could work out quite good value!

      Delete
  9. £12.50 is super high, but if they offer a lot, then it makes sense. I guess for me it would have to offer several markets and be an excellent interface

    ReplyDelete
    Replies
    1. I agree it is very high (2.5 times more than my current broker).

      I will try and work out whether they provide enough to compensate and how long it would take for the original cost to be regained through saved FX broker charges.

      I have heard little said against them and they do seem pretty fair (remarkably). I will keep you posted!

      Delete
  10. It's more than 8x more expensive than what I'm usually paying per trade... so I think I will NOT be switching anytime soon, unless a super high paid job comes along

    ReplyDelete
    Replies
    1. Wow! That is one very cheap broker you are using!

      I would definitely not move my entire portfolio over. However, it is possible it is an alternative for overseas investments.

      We will see!

      Delete