First, what’s a dividend expat?
Well, I think a dividend expat is someone who uses geographical arbitrage to their advantage, earning dividend income in dollars and spending in a (cheaper) foreign currency.
So you simply build out a sizable portfolio full of high-quality dividend growth stocks (sort of like I’ve done with my Full-Time Fund), and then you live off of the dividend income these stocks throw off.
Easy enough. That’s what many of us are striving for. And it’s what some of us have achieved.
Except there’s a twist.
You live off of this dividend income in a foreign country.
I spent a little time in Thailand in 2016 and got a glimpse of what the opportunity of living as a dividend expat might offer.
While it’s probably not for me personally, I think there are a few pretty compelling reasons why others may want to consider this idea for their own situations.
Becoming a dividend expat could substantially speed one’s climb up Mt. Freedom, allowing one to retire decades earlier than they might otherwise be able to.
There are three main financial catalysts behind that, and I’ll go over them quickly.
Lower Cost Of Living
This one is fairly obvious. And it’s where most of the benefits of geographical arbitrage are realized.
I’ll give you some quick real-life examples from firsthand experience.
In Chiang Mai, Thailand, for instance, you can rent very nice one-bedroom apartments right in the center of the city for under $400 per month. I also saw studios for under $200.
These are completely furnished units, requiring no concerns or costs around furniture. No leases are required. Security deposits are generally minimal, or non-existent. They often include utilities, TV, and Internet access.
Food costs very little, if we’re talking about local food. Western food is often imported, meaning it can sometimes actually cost more than it would in the US. But local food is very cheap. You can eat simple meals for between $1 and $2 per plate. Even food at restaurants is extremely cheap when compared to the US. I ate at a sushi joint where top-notch sushi was around $3 per roll (6-8 pieces).
Transportation is super easy and cheap. Tuk-tuks took me around town for an average of $3 per trip. Or you can hop in the back of a songthaew for less than a buck.
So on and so forth for just about every expense you can think of.
The foreign earned income exclusion means that if you live outside the US 330 or more days over a period of 12 consecutive months, you don’t owe federal income taxes on income (up to $100,800 for 2015) earned outside the US.
So if you, say, blog about your foreign adventures, or do any other kind of work outside the US, you can earn quite a bit of income and pay $0 in federal income tax.
Now, there are some caveats to consider here.
First, it doesn’t include self-employment tax.
Second, you may owe tax in the foreign country you’re living in.
Third, it doesn’t include dividend income (as it’s unearned income).
Whether or not you actually end up writing a check to the country you live in is altogether another subject, but I can only say that I actually talked to some expats (that blog) living in Thailand that pay no income taxes in the US or Thailand. So that’s just something to keep in mind. I’m neither condoning nor admonishing that.
The dividend income not being included also isn’t really a big deal, as dividend income is already a very tax-efficient source of unearned income. A single filer can earn up to $48,350 in qualified dividend income and still owe $0 in federal income tax (as that’s within the 15% tax bracket). Plus, no FICA to worry about.
As such, one could structure their life to earn a healthy six-figure income (through both earned and unearned income) and pay almost nothing in taxes. It’s not lost on me that I could live in, say, Thailand and pay somewhere around 3% or so of my total income (earned and unearned) in taxes – out the door.
Also, if you’re living abroad and renting, no property tax to worry about. That takes care of that.
I don’t have information on how every state taxes foreign residents, but I’d make sure to set up residency in a state like Florida (where I currently live) that has no state income tax. So no state or federal income tax to worry about.
Lower Healthcare Expenses
That 330-day rule mentioned earlier also qualifies one to bypass the individual mandate, meaning one wouldn’t have to purchase any US-based healthcare insurance.
So that automatically knocks off what ends up being a fairly hefty fixed monthly expense for most people.
What I would personally do at this point (if I lived abroad in a much cheaper country) is self-insure myself.
I don’t self-insure myself here in the US because of bankruptcy risk. If I were to come down with a major health issue or, say, get in some kind of accident, I could end up being on the hook for thousands upon thousands of dollars. Moreover, the individual mandate means the difference between not having health insurance (and paying the fine) and having health insurance is so minimal that the risk isn’t worth it at all.
Well, the individual mandate is out of the equation if you were to live full time overseas.
The other concern – bankruptcy risk – is significantly reduced due to the much cheaper cost structure of healthcare in many other countries.
Of course, one may change their attitude on this as they age, but one’s asset base (if they’re in the position to retire at a very early age in the first place) will likely be so large in the future that these concerns are probably alleviated. Nonetheless, one could always choose to take on some kind of international health insurance plan if they were so inclined.
Living abroad isn’t for everyone. And this article isn’t meant to discuss the lifestyle from a holistic point of view.
There are numerous other issues to factor in before considering the idea of becoming a dividend expat. Being far from family and friends, culture shock, differences in infrastructure, language barriers, navigating visas, and disadvantageous positioning as it pertains to local laws and deals are just a few things that could hold somebody back.
This article instead is just meant to highlight three major financial benefits available to dividend expats. The benefits are so substantial that the overall lifestyle drawbacks could be worth it for the right person (or couple).
I personally quite enjoy living in the US, but I can see how/why someone else might absolutely prefer living outside the US. And for some, many of those potential drawbacks I just listed could actually become benefits. Just depends on your individual circumstances.
It’s an interesting realization for me to sit here and know that I could live like an absolute king over in Thailand (or numerous other foreign countries) on the income I currently earn (both passive and active). I could live in a luxury apartment, eat out every day, work out at the nicest gym in town, get around everywhere by private tuk-tuks, do pretty much whatever I want, and never really have any financial concerns at all for the rest of my life.
However, much of this wouldn’t really add to my quality of life, and I generally prefer living in the United States. But I guess you never know…
What do you think? Ever considered becoming a dividend expat? Why or why not?
Thanks for reading.
Image courtesy of: iosphere at FreeDigitalPhotos.net.