Why non-income investors should look at UK shares

Dividend stocks can be a good source of income. And I think UK investors would do well to look closer to home for opportunities.

There are three main reasons, some of which are more obvious than others. One is low prices, one is tax efficiency, and the third is managing the risk of fluctuating foreign exchange rates.

Prices are low

In general, UK stocks tend to trade at lower levels than their US counterparts. For example, compare FTSE 100 a giant Unilever (LSE:ULVR) and the likes of Procter & Gamble or Coca-Cola.

Both P&G and Coca-Cola are formidable businesses, but Unilever is right up there with them. Over the past 10 years, the UK company has achieved the same – if not better – return on equity.

Unilever vs. P&G vs. Coca-Cola return on equity 2014-24

Created in TradingView

Despite this, Unilever trades at a multiple of 22 times earnings (P/E), lower than P&G (29) or Coca-Cola (29). And its 3% dividend yield is high because of it.

From an income perspective, I think this gives investors a reason to like UK stocks. It offers a high dividend yield without an obvious decline in the quality of the underlying business.

Taxes

Unilever's dividend yield is about 3%, compared to 2.3% for P&G and 2.7% for Coca-Cola. That may not seem like much, but the gap widens when you consider the tax implications.

For UK investors, dividends from US stocks are subject to a 30% withholding tax (reduced to 15% on the W-8BEN form). This means that UK shareholders should not expect the advertised yield.

After tax, that's a 2% return from P&G and a 2.3% return from Coca-Cola. UK-listed Unilever, however, means there is no such tax – investors should get 3%.

If someone holds all three in an ISA (and thus exempt from dividend tax) the difference can be huge over time. And I think that's something that cash-strapped investors should be aware of.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

International trade

There is one last consideration to keep in mind, too. Distributions in US dollars must be converted back into British pounds for UK investors and the exchange rate may vary.

Over the past 12 months, the pound has risen by around 6% against the dollar. That means the US stock would need to increase its dividend by that amount for UK investors to get the same amount.

Of course, things could go the other way – a weaker pound could cause UK investors to earn more. But it is an additional source of uncertainty from businesses that are likely to be predictable.

Unilever is not completely immune to this risk, most of its revenue is generated outside the UK. But with its dividend declared in pounds, income investors should at least be clear about what they will get.

UK stocks

There is always risk when it comes to investing. Regardless of Unilever, there is a constant risk that the company may struggle to keep its product portfolio in line with consumer preferences.

However, earning income is all about finding stocks that can consistently generate more income. And from that perspective, I think there are good reasons for UK investors to look closer to home.