SPECIAL REPORT The Top 7 Stocks for 2024

Special Dividends = Special Returns


Is your favorite stock paying a special dividend before the end of the year?

Many are, including Costco (NASDAQ:COST), which announced Wednesday it will dole out a one-time dividend of $7 per share to shareholders of record on Dec. 10.

The neglected cousin to the more familiar regular dividend, special dividends can juice the performance of a stock well beyond the norm. With a little sleuthing, though, investors will find companies paying special dividends as a routine part of their capital allocation.

I’ll illustrate — using specific examples — how you can profit from this relatively rare shareholder reward.

Taxes, Taxes, Taxes

American companies are announcing special dividends at a blistering pace. A total of 103 have announced they will pay a special dividend in the fourth quarter — 72 more than is typical in the final quarter of the year. Movado (NYSE:MOV), Carnival (NYSE:CCL) and Las Vegas Sands (NYSE:LVS) are among some of the most recent companies to announce special payouts.

As I mentioned in the opening, Costco will pay a special dividend that amounts to roughly $3 billion, or 62% of its current cash stash. It’s doing so in large part because the tax on dividends is expected to rise for some of its shareholders in 2013.

For those of you that are unfamiliar with special dividends, this threat has been ongoing for several years now; President Obama and Congress appear ready to extend the Bush-era tax cuts for another year for all individuals making less than $250,000. For most people, this means the tax on dividends will remain 15%. Clearly, Costco and the rest of the Johnny-come-lately special dividend payers seek to appease their wealthiest investors, but that’s a subject for another day.

As a proponent of special dividends, the increased activity is welcome news. However, I seriously doubt most companies will incorporate them into their long-term capital allocation plans — and that’s a shame, because they provide managers with the ultimate flexibility for rewarding shareholders.

Why They’re So Special

In good times, when cash accumulates unexpectedly thanks to better-than-anticipated cash flow, special dividends give firms the opportunity to pay out what isn’t needed to operate the business; in bad times, they’re under no obligation to pay a regular dividend, which many shareholders have come to consider a right rather than a privilege.

Ultimately, I view the regular use of special dividends as producing a more consistent total return than either regular dividends or share repurchases. Two examples to make my case are Buckle (NYSE:BKE) and Schiff Nutrition International (NYSE:SHF).


From the beginning of 2008 to the end of 2012, Buckle will have paid out $3.98 in regular dividends and $13.05 in special dividends — $17.03 in total. During the past decade, BKE has increased its operating income in all 10 years; 2012 should be no different.

CEO Dan Hirschfeld — Buckle’s largest shareholder with 33.8% of the stock — has received approximately $276 million in dividends over the past five years, while his current shareholdings are worth more than $800 million. He has done well for himself, but so have his fellow shareholders. By my calculation, Buckle has achieved an annualized total return of 26.6% since the end of 2007 through Nov. 23, with 11.6 percentage points from dividends (76% of the special variety) and 15 percentage points from capital appreciation.

You couldn’t balance that any better if you tried.


Weider Health and Fitness is SHF’s largest shareholder, with a 34% economic interest and an 85% voting interest.

Since July 2007, SHF has made four payouts totaling $3.20 per share for an annualized total return of 10.1%. Unlike Buckle — which pays a regular dividend and has a small share repurchase plan — Schiff doesn’t pay regular dividends, and repurchases shares solely to offset dilution from executive compensation.

At the end of October, Bayer (PINK:BAYRY) offered to buy the company for $34 per share. Reckitt Benckiser (PINK:RBGPY) countered Nov. 16 with a $42/share offer, and Bayer ultimately dropped its bid on Nov. 20, sealing the deal for Reckitt Benckiser.

Schiff’s annualized total return since July 2007? A whopping 50.4%. Thanks to the recent takeover battle, its annualized total return increased by 15.8 percentage points in just three weeks. Excluding the takeover premium, special dividends accounted for approximately 29% of its total return with capital appreciation generating the rest. The balance between dividends and capital appreciation isn’t nearly as pronounced as Buckle’s, but the total return is impressive nonetheless.

How to Put Special Dividends to Work

If you want to take aim at companies that use special dividends to push the needle, follow these four steps:

  1. Go to Google (or another search engine) and search the words “special dividends,” then look for company announcements. Or go to the SEC website and do the same under the advanced text search, looking specifically for Form 8-K.
  2. Next, use Morningstar or some other site that keeps track of dividends. Look for more than one payout over a three-to-five-year period.
  3. Finally, confirm that the stock in question has a large shareholder (more than 20%) that isn’t a mutual fund company or some other institutional investor.
  4. Do you homework on the financial condition of the company and its prospects for the long-term. If everything checks out, buy-and-hold for three to five years (or longer), and enjoy the extra boost to your portfolio’s returns.

There’s an argument to be made that special dividends only attract temporary investors who come for the quick return, then go away once the dividend has been paid, making the distribution a waste of money. While I’m sure this happens a fair bit, it’s also true that a stock’s share price will be readjusted by almost the exact amount of the dividend.

Buckle paid a $2.25 special dividend in October 2011 along with its regular quarterly dividend of 20 cents. Its stock opened $2.39 lower the day after the payment. In other words, the dividend gain is erased by the drop in share price, rendering the temporary investor’s bet a case of arbitrage, where he or she believes the news of the dividend will deliver capital appreciation greater than the amount of the special dividend.

That’s a mug’s game.

In my opinion, the special dividend — when used effectively — is the best way to deliver investor returns over the long haul. Shareholders of Buckle and Schiff probably would agree.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

Article printed from InvestorPlace Media, https://investorplace.com/2012/11/special-dividends-special-returns/.

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