Special Dividends: Companies with Extra Shareholder Rewards

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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. In the first three quarters of 2017, special dividends totaled $30.6 billion globally, ahead of last year’s pace, according to Janus Henderson Investors.

Five companies that pay special dividends.

Although still far behind the amount of regular dividends paid out (some $129 billion just in the third quarter of 2017), 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 the world of special dividends.

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.

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 partner, 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!

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There are several reasons why a company might pay a special dividend, including:

  • 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, 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 special 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.

A Special Dividend Often Causes Share Prices to Decline 

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 the Saks’ special dividend—I made a lot of money in a short period of time. But, realistically, a special dividend is 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 Wall Street’s Best Investments and Wall Street’s Best Dividend Stocks are ideas for the long-term.

Take CME Group (CME), for example. Timothy Lutts, Chief Analyst of Cabot Stock of the Week, recently recommended the company, saying, “CME (previously known as Chicago Mercantile Exchange), is a conservative bet on the continuation of this long and strong bull market. The company operates four major financial exchanges (CME, CBOT, NYMEX and COMEX) where investors trade derivatives on stocks, interest rates, commodities and more. Plus, there’s a kicker. CME now allows futures trading of Bitcoin, which means the firm will benefit no matter which way Bitcoin goes. Anyway, CME has delivered steady single-digit revenue growth for years while achieving double-digit earnings growth—an impressive feat.”

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.

China Mobile (CHL), recommended by Martin Weiss, editor of Martin’s Ultimate Portfolio, recommended this stock, saying, “Our model identified China Mobile (CHL) as a low volatility company, with accelerating ratings momentum.

“Specifically, there are four key reasons why CHL stands out:

“First, we like China Mobile because of its dominant market presence. It is the leading telecommunications services provider in Mainland China and Hong Kong. It sports the world’s largest mobile network, and it has the world’s largest mobile customer base.

“Second, CHL has solid fundamentals. This came across loud and clear in the company’s Interim Report released in August that noted a boost in sales, net income and earnings-per-share (EPS) compared to the year-ago period.

“Third, China Mobile benefits from expanding information consumption in China and Hong Kong.

“Fourth is a bullish price outlook.”

Nokia (NOK) was a pick from George Putnam III, editor of The Turnaround Letter. George noted, “Finland-based Nokia (NOK) is one of the largest global producers of telecommunications equipment. In 2013 and early 2014, the company transformed itself

by selling its cell phone handset operations to Microsoft and buying out its partner Siemens’ interest in a network equipment joint venture.

“The company has a particularly strong position in the U.S., Asia (outside of China) and Latin America. This has allowed Nokia to improve the margins in this business, a trend that should continue. It can move more aggressively to monetize the value in its patents through new licensing deals.

“The balance sheet is very solid, with net cash (cash minus debt) of more than 5 billion Euros at the end of 2014. In addition, the weak Euro should give Nokia a pricing advantage in many of its markets. The company has just instituted a small regular dividend, and we could see that grow over time as profitability improves.”

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

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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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