Special Dividends: Companies with Extra Shareholder Rewards

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It Pays to Own Stocks that Pay Special Dividends. Here’s How They Work.

Who doesn’t love extra money? Many shareholders were happy to put a few extra dollars in their pockets last year in the form of special dividends. Annually, investors around the globe receive billions of dollars in special dividends.

Although still far behind the amount of regular dividends paid out (some $263.3 billion just in the first quarter of 2019), the pace of special dividends is picking up. I’ll share a few more that are already scheduled in a moment, but first, let’s take a peek at how they work.

Why Do Companies Issue Special Dividends?

A special dividend is just what it sounds like—a payment made to shareholders that is separate from its regular dividend cycle. Most of the time it is a one-off. However, that’s not always the case.

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A few years ago, I read about a $4 special dividend that was going to be paid by Saks Incorporated (no longer a public company). I wasn’t a Saks shareholder at the time, but since the shares were trading in the teens, I figured an additional $4 would be a pretty nice return.

I bought the stock and cashed it in as soon as I received the special dividend. However, my friend, Don, decided to hold onto his shares for a while, and was again rewarded with a $4 per share special dividend a few months later. Not too shabby!

Here are some common reasons why companies issue them:

  • Corporate restructuring, with a selloff of large assets. That was the reason for Saks’ first special dividend in 2006—the company sold off its Bon-Ton stores.
  • Loads of cash on hand—Saks’ reason for its second special dividend.
  • Cyclical earnings or a large non-recurring capital gain—Ford (F), for example.
  • Tax policy. For example, if a lower-than-current-dividend tax rate is expiring—such as in 2012, when the dividend tax rate was 15%.

Special Dividends Can Have Tax Implications

Most regular dividends are taxed as qualified dividends or long-term capital gains. However, special dividends may be a combination of capital gains, ordinary income and returns of capital. Most are considered return of capital, but pay attention to the 1099-DIV forms you receive from your investments, so that you know exactly how the dividend is being treated. Of course, you should have some idea prior to tax time because the company should advise shareholders at the time of the dividend.

Side note: Because special dividends decrease the company’s book value—at least temporarily—you might see the share price decline upon the payment of the dividend. That happened with Saks, too, but I was able to sell my shares immediately upon the dividend payment.

To Buy or Not to Buy

Honestly, I was lucky with my Saks special dividend—I made a lot of money in a short period of time. But, realistically, these one-time payouts are just a starting place to determine if a stock is the right one for you. I’m a long-term investor, and the majority of my recommendations in my Wall Street’s Best Investments advisory are ideas for the long term.

Take Warrior Met Coal, Inc. (HCC), for example. Ian Wyatt, editor of Dividend Confidential, and one of our contributors, closely watches for upcoming special dividends. Last spring, he recommended HCC, as the company was getting ready to pay its third special dividend since November 2017! Altogether, those dividends amounted to around $20—that’s a pretty good return, especially since the company’s shares were trading around $20 when the first special dividend was paid in 2017.

If you are interested in researching additional stocks with upcoming special dividends, here’s a partial list of what’s on the schedule:

A couple of these companies have recently been recommended in my newsletters.

Doug Gerlach, editor of Small Cap Informer, recently updated his comments, writing, “National Beverage Corp. (FIZZ) announced results for its second quarter. Sales and earnings were both better than analysts had expected, and the stock saw a nice bump up. November LaCroix orders were ahead of last year’s pace, and market acceptance was high for a new line of European-inspired flavors, including HiBiscus, LimonCello, and Pastèque. National Beverage is a buy up to $66.”

When Ian Wyatt recommended National Presto Industries, he commented, “National Presto Industries runs two primary businesses: housewares and small appliances and defense ammunition. Housewares and small appliances offer name recognition. The defense ammunition business offers profits. The defense ammunition business is actually the larger and more profitable of National Presto’s two businesses. Efficiency is the draw. Management continually squeezes more from the revenue it generates. National Presto’s business generates a lot of cash. I like how management has conservatively managed the capital structure. Most of all, I like the special-dividend-trade opportunity. National Presto has a 30-year history of paying an annual special dividend.”

As always, these are just ideas. Please do your research to determine if they are good fits for your portfolio.

To receive updates on these stocks or to get access to the best investments from Wall Street’s top guns, consider a subscription to Wall Street’s Best Investments.

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Nancy Zambell

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Nancy Zambell, Editor of Wall Street’s Best Investments, has spent 30 years helping investors navigate the minefields of the financial industry. Nancy scours more than 200 advisories and research reports to select the top recommendations, which she collects for you in this easy-to-read digest.

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*This post has been updated from an original version, published in 2017.

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