The words “fiscal cliff” have been plastered across financial media for months, but amid the number of worries tied to it, two more words might be among the most feared:
The “dividend dive.”
Call it what you like, but income investors have reason to be concerned about the potential for taxes on dividends to go through the roof — from its current 15% to a headline-grabbing 40%.
Wall Street is responding to the noise (not to mention possible issues concerning the use of cash hoards) in a number of ways.
Several companies — most notably Walmart (NYSE:WMT[1]) and Leggett & Platt (NYSE:LEG[2]) — are moving up their dividend payment dates to late December 2012 from January 2013 to allow shareholders the advantage of a (guaranteed) lower tax rate. But another strategy is starting to take hold: special dividends.
Special dividends, as the name implies, are one-time special payments — wholly separate from regular quarterly dividends — that companies make to use cash in a way that rewards shareholders. And riding these special payers is a compelling strategy for investors looking to get some quick income with minimal tax consequences before year’s end.
The strategy is easy enough: Find a company with an upcoming special dividend, buy shares prior to the ex-dividend date, and wait for the payout. It’s your choice what to do with the shares after your dividend payment is cashed or deposited.
Of course, there are some possible pitfalls to jumping aboard these special payers:
- Crowded trades. Many investors jump on board for the payout, bumping up the stock price — thus, it could get pricey to position yourself for that one-time dividend.
- Loss of value. The company’s stock price is immediately reduced by the amount of the special dividend; a $5 per share special dividend knocks that same $5 off the price at the close of the day’s trading.
- The hangover. Just like many people got in for the dividend, many people will be trying to get out as soon as possible. Selling immediately after the payout defeats the purpose (because the shares lose the value you gained in the payout), but many people will be looking to get out as soon as they can with the gain, which could hinder shares in the short-term.
According to market intelligence provider Markit, more than 100 companies have declared a special dividend[3] for the fourth quarter, far exceeding the average of 31 companies. Here are seven big names going ex-dividend in the next couple weeks:
| STOCK | TICKER | DIVIDEND/ SHARE |
Special div. yield |
EX-DIVIDEND DATE |
PAYMENT DATE |
| AOL | AOL[4] | $5.15 | 14% | 12/5/12 | 12/14/12 |
| Brown-Forman | BF.B[5] | $4.00 | 5.8% | 12/12/12 | 12/27/12 |
| Costco | COST[6] | $7.00 | 6.8% | 12/10/12 | 12/18/12 |
| Dillard’s | DSS[7] | $5.00 | 5.65% | 12/7/12 | 12/21/12 |
| Fastenal | FAST[8] | $0.50 | 1.2% | 12/7/12 | 12/21/12 |
| Heico | HEI[9] | $1.14 | 2.8% | 12/10/12 | 12/21/12 |
| Las Vegas Sands | LVS[10] | $2.75 | 5.9% | 12/10/12 | 12/18/12 |
Let’s not act like these companies are acting solely in the best interest of retail (or even institutional) investors, though. For many, the biggest winners will be insiders. Another report from Markit shows that at least 50% of the special dividends are coming from firms where inside ownership is more than 25% of the total shares outstanding. For example, The Washington Post reports Las Vegas Sands’ CEO Sheldon Adelson and his wife own nearly 50% of LVS, and they’ll clear more than $1 billion from the payout.
Still, that doesn’t mean you won’t get yours.
The decision to enter the “special dividend” game isn’t an easy one. On one hand, it’s great to get that one-time “pop” of cash before New Year’s and have the security of knowing at what rate it’ll be taxed. But, you also have the aforementioned issues of the trade — so perhaps the best thing to do is only chase the special dividends of companies you believe in for the long haul.
And keep your eyes open: More companies will join the party before it’s all said and done.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long AOL.