Stocks and shares can be a great way of earning passive income. But there’s a lot to consider and investing in the right companies is only half the job.

The other half is working out how to hold onto the cash they return to shareholders. And there are some things I make sure I do to maximise the income I get from my investments.

Citigroup

One of the largest investments in my Stocks and Shares ISA is Citigroup (NYSE:C). The firm’s going through a lengthy restructuring process, but I’m optimistic about the long-term outlook. 

The US bank’s been divesting some of its global consumer operations where it doesn’t have the scale to compete. I expect this to result in a more efficient bank with some unique strengths.

The obvious source of uncertainty is the highly regulated nature of the banking industry. Citigroup‘s found itself on the wrong side of this in the past and it remains an ongoing risk.

I started buying the stock a couple of years ago and since then, the share price has climbed around 40%. That’s a big reason why it’s one of my largest investments.

When I first bought it, the dividend yield was just over 5%. But a rising share price has cut it back down to 3.1%. 

From a passive income perspective though, it’s worth noting the dividend has proved durable. Throughout its restructuring, Citigroup’s maintained its quarterly shareholder distributions. 

Taxes

Unfortunately, not all the cash the firm sends out reaches me. This is because distributions from US companies are subject to a withholding tax for UK investors. 

Holding my Citigroup shares in a Stocks and Shares ISA means my returns aren’t eligible for dividend tax. But the ISA does nothing to help me get away from the withholding tax. 

The standard rate is 30% – which is a lot – but a W-8BEN form brings this down to 15%. And in the context of a long-term investment such as mine, that can make quite a difference. 

With my Citigroup shares, it’s the difference between getting back 2.64% of my stake each year, rather than 2.18%. This doesn’t sound like much, but it can be significant over the long term.

Reinvesting at 2.18% for 30 years means I should eventually get 4.07% of my initial investment back each year. Doing the same thing at 2.64% however, leads to a 5.6% annual return.

The difference doesn’t sound like much. But the W-8BEN form could ultimately mean I get back 38% more passive income each year from my Citigroup investment.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Maximising returns

Whether it’s growth or passive income, the effect of buying the right stocks can be undone if investors can’t hang on to their returns. And I think this is extremely important. 

Sometimes, taxes are inevitable. But there are things investors can do to limit the effect of these on their passive income and this can make a big difference over time.

One of these is completing a W-8BEN form. It’s a key part of how I aim to maximise my dividend income from Citigroup, as well as the other US stocks I own.