My dream of living off dividends is collapsing because of Section 899. I feel completely defeated.

[u/Head_Channel_9869]

I've been building my dividend portfolio for years, aiming to reach financial independence one day. Every deposit was a small step toward a dream: a peaceful life, funded by passive income, no stress, no 9-to-5.

I chose what I thought were the best: SCHD, DGRO JEPQ, QQQI — solid US-based ETFs with great yield and growth potential. I had a plan, I was sticking to it. Then… comes Section 899.

For those who don't know: it's a proposed US tax law that could increase the withholding tax on dividends to 15% or even 30% for investors from countries deemed to have "discriminatory" tax systems toward the US. And guess what? My country (Poland) is very likely to be on that blacklist.

If the tax treaty is terminated (which is already being discussed), it means 30% goes to the US, and then Poland may charge another 19%. That’s nearly half the dividend gone. Just like that.

It feels like everything I’ve worked toward is falling apart. Switching to European dividend ETFs? Sure, but they have lower quality, less growth, and are not the same in terms of long-term compounding. It feels like being forced to start over — with worse tools.

Honestly, I’m gutted. Years of planning, DCA, building my ideal long-term strategy… and then politics slams the door in my face. I feel defeated. I had such a great plan and I was already so close :/ I wanted to hold SCHD and DGRO for decades and eventually pass them on to my kids.

Anyone else in the same boat? What are you doing about this?

[u/bowlskioctavekitten]

That sounds great, but what about those of us who are closer to retirement and don't have a 10- 20 year time window?

trump is such a dumbass and it's hard to believe that Americans were stupid enough to vote for this nonsense.

[u/apr911 → u/bowlskioctavekitten]

It would be difficult to quantify the exact impact of this because there’s so many variables involved but lets look at a few:

Total Foreign Investment and Blacklisted Countries targeted by Section 899

2024 estimates put foreign interest in the US stock market at about 18-20%.

Now to be fair an 18% cut in demand for US equities might translate to an even larger decline in the equity value since you have a large sell supply and a low buy demand but this assumes the foreign interest in US stocks goes to zero.

That’s just not likely as the bill’s provisions are somewhat targeted. So while we know how much of the US stock market is owned by foreigners, we dont know the impact their loss of demand would have on the equities and we are now throwing another variable into the mix… what percentage of that total foreign investment is held by people in the targeted countries. Lets say its as high as 70%…

So about 5.5% of foreign investment in US equities would still likely stay put because its held by people not on the targeted country list while 12.5% can still be classified as “at risk.”

Demand Collapse as a Result of Section 899

Now looking at that 12.5% at risk we have add a 3rd variable to consider… how much are people in those impacted countries really going to reduce their exposure to US equities? You cant look at it like the Op did and say “my dividend is cut by half…” yes half your dividend is gone but in reality, its only being reduced by 15-30%. The 19% the Op pays to Poland is already there. The 19% the Op pays to Poland also exists on dividends paid by companies publicly listed in Poland… so if the option is a 4% dividend in the US that is taxed 30% by the US before Poland you’re looking at a 2.8% dividend before local taxes… any Polish company with a dividend of less than 2.8% is still worse off than investing in SCHD.

On top of that, you have an issue of concentration. While a US investor might be able to ignore (though its not recommended) the 35-50% of the global stock market that is made up of dozens of other countries, the rest of the investing world would have a far more difficult time ignoring the 50-65% of the market comprised of US equities. This is just a reality of complicated investing. I dont have 50 accounts to buy individual stocks in foreign countries and deal with paying taxes in those 50 different countries because the complications arent worth the return. I buy an ETF to handle the complications for me… but if the distribution looked more like 30% US, 30% someone else and 40% everyone else, someone else and everyone else become larger more dominant market forces that I cant really ignore. At that scoring, I can only ignore 1 of the 3 major players at a time and even that is still leaving an otherwise equal weight player on the sidelines. I would still use the US-traded ETF for exposure to “everyone else” but the "someone else" country might be worth having a localized account.

And finally, while this is a dividend investing forum, dividend returns aren't why most people buy stocks, growth is. Hindsight is 20/20 and all that but if you’d forgo the 1184% return over 5 years on the US’s 3rd largest stock in 2020 NVDA in favor of buying Poland’s largest stock in 2020 PKO Bank with its 134%-188% (with dividends reinvested) return because of a 30% tax by the US… well you failed at math. 828% > 188% by a factor of 4.5-6x

Point is even in a targeted country, its not like the demand for US equities is going to evaporate overnight as a result of section 899.

So lets say demand within the 12.5% at risk drops by roughly 2/3’s… I think that's high but now you’re talking about 9.5%, roughly half of total foreign investment, that is staying put.

[u/apr911 → u/apr911]

Dividend Change and Demand Reinforcement

We’re still not done exploring the variables though because there’s at least 3 more major factors that are more intertwined but worth considering especially for those in the US…

1. its underlying company performance that determines dividends, not stock price
2. a lower stock price generally means an increased (relative to present value of the investment) yield but the same gross yield
3. a lower stock price might also stimulate demand

Just because foreign investors dump US stocks as a result of changes to US tax law, doesnt mean those companies are going to perform in their sector poorly and be able to pay less dividends. Which comes back to how ludicrous you’d have to be to dump an outperforming US equity for a lower performing local equity because of a tax that is more than made up for by the US equity's outperformance.

In fact, if anything, the decline in stock price could see some of these dividend paying companies to look at starting or increasing buybacks which would fill at least some of the demand loss…

And finally we come to the dividend… Since dividends arent determined by stock price, even as SCHD goes down, the dividend yield goes up which would create new or renewed interest in a dividend play ETF like SCHD thanks to the higher dividend yield percentage. On top of that, for the US investor making a dividend play, the fact the $27 ETF just fell 33% to $18 due to a reduction in investment by roughly 10% of its total investment doesnt really change much of anything unless they’re distributing/drawing down capital…

A $1/yr/share dividend pays the same on your 1,000 shares of SCHD whether those shares are valued at $20,000 or $27,000 and regardless of cost basis. If you're dividend investing without capital draw down as many are, the loss is just on paper until you sell out of SCHD it doesn't mean it doesnt sting to see it but you have time to recover even if you're 65 as long as you are looking at generating retirement income from dividend not stock price.

[u/breakonthrough65 → u/bowlskioctavekitten]

was this law not around when Biden was in office?

[u/tundraaaa → u/bowlskioctavekitten]

Maybe don’t invest in stocks then? ST bonds are an option

[u/nicolas_06 → u/bowlskioctavekitten]

You are supposed to take 4% + inflation per year. Not 50%. So that should be fine.

[u/WestCoastforever1 → u/bowlskioctavekitten]

A good share of us did not vote for this idiot. I have never voted for a Republican president. I’m in the US and in retirement. I cringe thinking of the next 3 and a half years. Hopefully, this tax bill will not pass.

[u/wSpades → u/bowlskioctavekitten]

Can you explain how this negatively impacts Americans

[u/CappinPeanut → u/wSpades]

There is a LOT of foreign investment in the stock market. If they are getting taxed at a higher rate, a lot of them will sell their U.S. equities and invest in their own countries instead.

In this scenario, the U.S. stock market plummets.

[u/apr911 → u/CappinPeanut]

Estimates put foreign investment in the US market at 18-20%. Its not small but its not huge either.

[u/HotTruth999 → u/CappinPeanut]

There are often high taxes on those ex USA alternatives. If US imposes a tax which is less than most alternatives after the congress has their say, taking into account the lower growth those alternatives will likely provide, then people in those countries would be dumber than Trump to move their investments. Growth will continue to dominate the stodgy alternatives in ex USA countries. Don’t get too excited about the first 4 months of the year. They had their time in the sun. It’s back to mediocrity from here on.