1 Thing Dividend Investors Need to Consider Before Buying Stock in Foreign Auto Companies

As our era of intense globalization rages on, more and more companies are looking to reach investors outside of their traditional boundaries. In 2013, an estimated $1.06 trillion was held in global depositary receipts. That said, buying shares of foreign companies through American depositary receipts, or ADRs, is not for everyone. Today we're taking a quick look at ADRs in the auto space to determine whether they belong in our portfolios.

Photo: The Motley Fool

What are ADRs
Any investor who has perused shares of the world's biggest auto manufacturers has likely come across a few ADRs. An ADR is essentially a certificate issued by an American bank that represents a certain number of shares of foreign company, for example Japan's Honda Motor Company or Italy's Fiat .

ADRs and the number of ordinary shares they represent can vary widely from company to company. For example, one ADR for Honda represents one ordinary share in the company, but one ADR for Toyota represents two ordinary shares in the company. Before you buy in, make sure you look up your company on one of two ADR-specific websites operated by  or  so you know exactly what you're purchasing.

Which auto stocks are ADRs
According to adr.com, there are 160 companies that fall under the "consumer durables" sector using depositary receipts of some kind worldwide. This is where you'll find your automotive stocks, including some of the familiar names listed below:




































Source: adr.com

Based on this chart you can see that the New York Stock Exchange does not really dominate as the exchange of choice for these big-name automotive players. Many companies will forgo listing on the American exchanges to avoid the fees and filing obligations required by the Securities and Exchange Commission. Trading over the counter forces companies to report to FINRA, but it does not subject them -- for better or for worse -- to the filing and reporting requirements of the SEC.

What else should investors know?
By and large, buying an ADR is a straightforward process, virtually the same as purchasing a domestic stock. Once you own an ADR, however, you will notice there is a big difference if and when dividend time rolls around.

Each foreign country has a different way of handling taxes on dividends. Some dividend tax withholding rates can be as high as 35% and as low as 0%. A company's motherland will take its share before the dividend hits your account, where it will then be subject to Uncle Sam's take, depending on what type of account you have.

Now, you can file for a foreign tax credit, but it will only cover withholding up to 15%. So if your stock is subject to foreign withholding taxes of 30%, you still lose 15% when it's all said and done. Therefore, it is crucial to know what the withholding rate will be for this particular stock before you make it the cornerstone of your dividend investment strategy. You can look up withholding rates here.

Bottom line
Buying foreign-based companies can add a new dimension to your portfolio, but they do require a little bit more work in the beginning, especially when it comes to dividend taxes, making it more important than ever to know exactly what you're getting when it comes to these foreign stocks.

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The article 1 Thing Dividend Investors Need to Consider Before Buying Stock in Foreign Auto Companies originally appeared on Fool.com.

Aimee Duffy has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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