eToro pays dividends when you invest in stocks and shares that pay them. But, even though you can receive dividends when you invest with eToro there are some downsides to dividend investing with them. In this guide, I will go through why eToro may not be the best account for long-term income and dividend investing.
Dividend investing on eToro
When you buy shares in profitable companies like AT&T and Vodafone you are entitled as a shareholder to receive a portion of their profits based on how many shares you hold. Based on their current dividend yields if you own $10,000 worth of shares in AT&T you should get a dividend of $760 (7.6%). If you own £10,000 worth of shares in Vodafone you should get a dividend of around £100 based on their 10.03% dividend.
- Related guide: Dividend investing explained.
You are entitled to the dividend payment if you hold a stock over the ex-dividend date. But, you need to take into account that when a stock goes “ex-div” the share price will often drop by the equivalent amount, to reflect this. Dividend arbitrage is no longer possible for retail investors like it was in the old days. It is still a practice but is largely used by large hedge funds to arbitrage tax rates in different regions. For example, if your account is based in a tax haven you pay less tax when you receive it, and they declare it elsewhere. But that’s a guide for another day…
But for the average eToro investor, when a company pays a dividend (on the dividend payment date) it gets paid into your free cash balance and you can see this in your account history. You will be taxed on this dividend at source, and as we will explain you then may have to pay further tax on it.
Before I get on to why eToro is not good for dividend investing, There are good points about investing in dividend stocks with eToro for instance;
- You can buy shares commission-free
- There is no custody account for holding shares
- You can short dividend stocks with CFDs
But, eToro is not the best place if you are a dividend investor, here I’ll explain why and what better options are available.
No ISA tax-free dividends
So you get taxed more on dividends
Dividend investing is great for long-term investors because it can help you generate regular income from your investments. If you have a large portfolio of dividend-paying stocks, you should receive regular dividend payments throughout the year. However as eToro does not have a proper ISA account, it means that you have to buy dividend stocks and ETFs in a general investment account, which means that you have to pay income tax on the money you receive from these dividends.
If eToro offered an ISA account you could receive this dividend income from stocks in your ISA account and not pay income tax on them.
Note: Toro does have an ISA partnership with Moneyfarm, but it is for managed portfolios rather than individual shares.
If you want to save on tax on your dividend payment income, you should use a stocks and shares ISA account.
AJ Bell is a good ISA account for dividend investing because they charge a low annual fee of 0.25% for holding shares which is capped at £3.50 per month.
No SIPP for retirement dividends income
So you get taxed on dividend income for retirement.
A SIPP is similar to a stocks and shares ISA in that when you invest in it your profits and income are tax-free. So if you want to buy high dividend-paying stocks to generate income for your retirement you won’t get any tax relief. This is a shame, as big established profitable companies usually play a large part in the retirement portfolios of many investors. It would be nice to see eToro introduce a self-investment personal pension investing account. If you want to invest in dividend stocks for your retirement Interactive Investor is a good option and won “best SIPP account” in our 2023 awards.
No dividend reinvesting
So you can’t automatically reinvest your dividend income back into shares
Whenever you invest in funds in the long-term you normally get the choice between an “income” or an “accumulation” fund. The income fund means you get paid dividends out in cash. the accumulation option means that the dividend payments are automatically reinvested back into the fund for you.
So for example, if you wanted to reinvest your £100 Vodafone dividend automatically, whenever your received a dividend your stock broker would automatically buy you some more shares. So, as you receive income from dividends, your position in Vodafone grows.
Dividend reinvesting is an excellent form of compounding returns. Which can grow exponentially over time. Unfortunately, eToro does not offer this, whereas platforms like Hargreaves Lansdown have a feature that will reinvest your dividends for you. You can even set the threshold of when you want dividends investing. i.e. when they reach £10 or £100 or so on.
- Related Guide: eToro Alternatives & Competitors
Dividends paid in USD, inactive & withdrawal fees
This is a major gripe of mine about eToro for UK investors. If you buy UK shares you are forced to do it in USD. This means that every time you deposit money into your eToro account they convert it to USD and charge you 0.5%, so you are immediately losing out. It also means that when you convert this back in to GBP you lose out on the FX. plus they charge $5 to withdraw money, so if you are a small dividend investor these fees can quickly eat into your dividend yields.
Another issue is the fact that dividend investing is normally a long-term game where you don’t need to check your account on a regular basis. eToro say that “After 12 months with no login activity, a $10 monthly inactivity fee will be charged on any remaining available balance. No open positions will be closed to cover the fee.” This means that if you don’t login to check your account, your dividend income can be eroded away from in-activity fees.
No bonds (coupons instead of dividends)
The last point I want to make is about bond investing. Bonds pay coupons rather than dividends, but they are still an excellent tool for generating income from investments, in a similar way to dividends. But unfortunately, you cannot invest in listed corporate bonds through eToro, which is a shame, because a lot of income investors try to build a balance of dividend-paying stocks and bonds on listed companies (that can now be traded on the LSE ORB). I’d like to see eToro introduce some more bonds on their platform to help investors diversify.
If you want to invest in bonds you can visit our guides on:
- Best bond brokers
- How to invest in bonds
- Buying Gilts (government bonds)
- How to make money from bonds
Richard is the founder of the Good Money Guide (formerly Good Broker Guide), one of the original investment comparison sites established in 2015. With a career spanning two decades as a broker, he brings extensive expertise and knowledge to the financial landscape.
Having worked as a broker at Investors Intelligence and a multi-asset derivatives broker at MF Global (Man Financial), Richard has acquired substantial experience in the industry. His career began as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson), following internships on the NYMEX oil trading floor in New York and London IPE in 2001 and 2000.
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