We can debate all day whether the U.S. will go over the fiscal cliff, or avoid it, or if it even matters, but one thing we can all agree on is that income investors deep in dividend stocks are shaking in their boots. After all, the taxable rate for payouts could go from a current 15% to as high as 43% — a big deal, considering dividend stocks have become portfolio staples for many retired and baby boomer investors.
Yet, it won’t be all lumps of coal in dividend investors’ stockings this holiday season. A variety of firms — a whole heck of a lot actually — are taking steps to soften the blow of the pending fiscal tax Armageddon.
For investors looking for income in the new year, these special and early dividend payments could be one of the markets best gifts for 2013.
Two-Hundred & Twenty-Eight
Back in 2003, the Bush tax cuts lowered the top income tax rate on qualified dividends by 15%. With the expiration of those tax rates and with the introduction of taxes associated with Obamacare, the top tax rate on dividends is set to rise to as high as 43% for high-income earners.
In an attempt to boost shareholder morale — and stock prices, too — a whole host of firms are planning on return more cash into investors pockets, sooner rather than later.
According to data provided by S&P Capital IQ, more than 228 companies announced plans to pay a special one-time dividend by the end of the year in November. That’s a staggering 217% increase versus November 2011. At the same time, a whole host of firms have decided to move up their fourth-quarter payments — which typically occur in January of the next year — into this December.
In the weeks since the election, firms ranging from retailers Dillard’s (NYSE:DDS) and Costco (NASDAQ:COST) to racetrack/casino owner Churchill Downs (NASDAQ:CHDN) have joined the growing ranks of firms that have moved up their payments, issued special dividends or done both. Standard & Poor’s estimates that more than half of the firms in its benchmark S&P 500 Index will announce a special payment or pay their dividends early before the end of the year.
All in the name of saving investors some dough come tax time.
While these payments certainly will provide some relief to the average widow and orphan come tax time, the payments are a product of two factors — heavy insider ownership and huge cash bundles.
First, it’s no secret that corporate America is hoarding cash. Trillions of dollars continue to sit on company balance sheets, and earnings still remain pretty good. Recent stumbles have been more about missing analyst estimates, not the fact that firms aren’t still making money. Add in low interest rates thanks to the Federal Reserve’s tinkering, which makes access to credit cheap, and it’s no wonder that many firms have been boosting their payouts all year. The pending fiscal cliff and higher tax rates just accelerates that fact.
The second and perhaps biggest reason is major insider ownership. The vast majority of firms who are announcing special dividends or moving up their payments are owned heavily by their CEOs, board members or founders — exactly the people who will be directly affected by the 43% tax rate going forward.
For example, the family of Walmart (NYSE:WMT) founder Sam Walton owns roughly half the company’s shares and probably would pay much higher taxes on dividends paid after Dec. 31 unless Congress takes action. So it’s no surprise that firm has moved up its fourth-quarter payment into 2012. Likewise, Las Vegas Sands (NYSE:LVS) CEO Sheldon Adelson will profit more than $1.2 billion from its special dividend.
Should Investors Follow Suit?
Jumping on the fourth-quarter dividend bandwagon could be a great way to frontload your 2013 income needs while paying less in taxes, especially if you’re in the top two tax brackets. Dividend capture strategies — which involves buying a firm just in time to get the dividend, then selling it shortly after — will benefit from the lower tax rates on both dividends and short-term capital gains. Investors then can keep the proceeds of the special dividends on the sideline until they need it in the new year.
However, investors will need to hurry to benefit from these payouts. To catch the special dividends issued by firms like teen retailer Buckle (NYSE:BKE) or Jack Daniel’s producer Brown-Forman (NYSE:BF.B), portfolios will need to hold shares of the firms within the next two weeks.
For those looking for a accelerated payout, but need more time to act, old tech stalwart Oracle (NASDAQ:ORCL) could be a buy. The database and business software company is speeding up the payment of three dividend payments scheduled for 2013. The payouts worth 18 cents a share in total will be made by the end of the calendar year and represent January, April and July’s 2013 payouts. Like the other examples cited above, Oracle founder Larry Ellison is the company’s largest shareholder. His 1.1 billion shares will net him roughly $198.9 million in tax efficient dividends.
Investors looking to keep the taxman at bay might want to follow Ellison’s lead and pick up some shares.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.