Dividend Timing – The UK vs. the US
The differences between UK and the US do extend to many areas of life, and one of our favourite topics, divdends, is no exception. American shares tend to pay dividends every quarter, whereas UK shares usually pay every 6 months. Moreover, US dividends will be split equally throughout the 4 payments, whereas British companies tend to have an ‘interim’ vs. a ‘final’ payment, with the final payment typically being twice as much as the interim.
Why is this?
Well, I don’t actually know! And I even tried to research the answer, to no avail. However, these issues are something to think about if you are investing for income, as you may have quite a wonky inflow of payments if you invest solely in UK shares, due to the interim payment being a lot less than the final payment. There are, in fact, a few British companies that pay quarterly dividends.
However, in the ‘accumulation phase’ of investing, it does not matter that much when dividends are paid throughout the year, as it is your goal to accumulate shares, rather than to live off the income (from dividends) provided by shares at this stage.
I am hopefully going to live off passive income in the future – preferably long before my state retirement age (currently 67, although I guess it will increase again before then!) arrives. I am planning to do this through earning a combination of active and passive income… with the latter hopefully taking over before the age of 50 (I have a touch over 15 years to go).
I have set a series of financial, as well as general, goals which I hope will help us to achieve financial independence, as a family, over the next 15+ years. At the moment, these are mostly being fulfilled by investing in dividend-paying shares, mostly British ones. Over time, I hope to add other sources of income, such as small businesses, rental properties, and maybe some IP or some other similar kind of recurring payment/royalty streams.
As I am currently accumulating, it doesn’t matter which month the dividends are paid, or that the UK shares pay a 35:65 split payment, especially since I am just going to reinvest the dividends in more shares anyway. But I have been wondering about maybe trying to look for more shares that pay quarterly dividends, and trying to balance them out a bit. If they’re really good ones, after all, I can always add in more shares regularly and then I have a more even cashflow throughout the year.
From a psychological perspective, I really like this, as it makes me feel as though things are running smoothly and I am in control of my money. Money is coming in regularly, and I am able to reinvest regularly. This is similar to my perspective on buying enough shares to get you at least one free share, come dividend payout time. Of course, this is another quirk of the UK vs. US systems, as I have not been able to find a UK broker who will let one accumulate fractional shares (if anyone knows of one, get in touch!).
From a value investing perspective however, this is kind of silly, because I want to buy shares based on whether they are good value, rather than whether they pay dividends in January for example. In the future, I will hopefully be reliant on these passive streams to provide me with a regular income, so perhaps another way of doing it would be to make sure that I set up some kind of ‘buffer account’ from which I pay myself a regular, monthy ‘salary’ so to speak. For example:
- I pay annual spending amount from my investment account into a current account
- I set up a monthly transfer of the annual amount divided by 12
- That will be my ‘salary’
Anything above the annual required amount will get reinvested. If I do not have enough dividends or other passive income arriving, then I cannot do this method. This method is really for when the income exceeds my annual spending needs.
Over to You
Do get in touch and tell me if you have any ideas about smoothing out your cashflow from passive income!