Dividend Tax Drag on International Funds in Excel Formula

Dividend tax drag is the negative effect of the dividend structure of a unit investment trust (UIT) without an automatic reinvestment program, whereby investors can’t immediately reinvest their dividends. There is a time lag between when dividends are issued and when those dividends can be reinvested.

This can also apply to international funds, such as ETFs and mutual funds, that invest in foreign stocks and pay dividends to their shareholders. These dividends may be subject to foreign withholding taxes, which reduce the amount of income that investors receive from their international investments. Foreign withholding taxes vary by country and can sometimes be reduced or exempted under tax treaties.

To calculate the dividend tax drag on international funds, we need to know the following information:

• The dividend yield of the fund (%)
• The foreign withholding tax rate (%)
• The U.S. tax rate on dividends (%)
• The number of years of investment
• The initial investment amount ($)
• The annual growth rate of the fund (%)

We can use the following excel formula to calculate the dividend tax drag:

=DIVIDENDS*(1-FWT)(1-US_TAX)-DIVIDENDS(1+GROWTH)^YEARS

Where:

• DIVIDENDS = Initial investment * Dividend yield
• FWT = Foreign withholding tax rate
• US_TAX = U.S. tax rate on dividends
• GROWTH = Annual growth rate of the fund
• YEARS = Number of years of investment

This formula calculates the difference between the dividends received after taxes and the dividends reinvested at the same growth rate as the fund. This difference represents the opportunity cost of not reinvesting the dividends immediately.

For example, let’s assume the following scenario:

• The initial investment is $10,000
• The dividend yield of the fund is 3%
• The foreign withholding tax rate is 15%
• The U.S. tax rate on dividends is 20%
• The number of years of investment is 10
• The annual growth rate of the fund is 7%

Using the excel formula, we get:

=100000.03(1-0.15)(1-0.2)-100000.03*(1+0.07)^10 = $-1,016.76

This means that the dividend tax drag on this international fund is $1,016.76 over 10 years. This is the amount of money that the investor would have earned if they had reinvested the dividends immediately instead of paying taxes on them.

To illustrate this in an excel table, we can use the following steps:

• Enter the initial investment amount in cell A1
• Enter the dividend yield of the fund in cell B1
• Enter the foreign withholding tax rate in cell C1
• Enter the U.S. tax rate on dividends in cell D1
• Enter the number of years of investment in cell E1
• Enter the annual growth rate of the fund in cell F1
• Enter the excel formula in cell G1
• Format the cells as percentages or currency as appropriate
• Label the cells as shown below