Editor’s Note: Today, we are excited to feature Kyle Amato, Wealthy Retirement‘s Financial Research Associate. Kyle is going to pull back the curtain on how you can earn even more on your money by seeking out companies that feel the holiday spirit… Read on to learn more.
– Mable Buchanan, Managing Editor
‘Tis the season…
And it has everyone feeling extra generous… including, perhaps, some of the companies in your portfolio.
Many companies are putting a little something extra in their shareholders’ stockings in the form of special dividends.
Over the last two months, 45 U.S. companies have announced special dividends.
Traditional dividends are issued by a company’s board of directors and are paid out regularly – often monthly or quarterly – throughout the year.
Special dividends, on the other hand, are, well, special. They’re typically larger than recurring dividends since they’re one-time cash payouts.
Companies issue special dividends for a variety of reasons…
- Extra cash on hand: Sometimes companies will hand out special dividends when they sell a large asset or generate a large amount of cash during the year.
Special dividends are another way for companies to distribute profits directly to shareholders.
- Financial restructuring: A company may also pay special dividends when it spins off a subsidiary or wants to change its financial structure.
Paying a large one-time cash distribution will alter the percentage of debt to equity that’s used to finance the company.
- Special tax benefits: Companies sometimes pay special dividends when they’re expecting a dividend tax rate increase in the near future.
But ultimately, the No. 1 reason companies issue dividends – special and recurring – is to reward current shareholders and attract new investors.
Special dividends also provide a tax benefit for shareholders.
Traditional dividends are taxed as long-term capital gains, while most special dividends are not taxed until the position is sold.
Shareholders immediately reap the tax benefit because a special dividend often lowers the cost basis of the investment.
For example, if you received a $1 special dividend on a $45 stock, at the end of one year, your cost basis would be $44.
If you then sold the stock for $55, you would owe tax on $11 in capital gains instead of $10, but the dividend itself would not be taxed.
(The only exception is if the investment is held in a tax-deferred account. In this scenario, the shareholder will miss out on the tax benefit. Distributions made after an investor reaches age 59 1/2 are taxed as regular income.)
Approximately 40% of special dividends are issued in the months of November and December.
On average, shareholders have received $10.71 per share from each special dividend over the past 10 years.
And despite a rocky 2020, there are plenty of companies looking to share the wealth with investors.
A Bright Spot in a Difficult Year
Take National Beverage Corp. (Nasdaq: FIZZ), for example…
On November 20, 2018, the owner of the popular drink LaCroix announced a special dividend of $2.90 per share.
It had just come off its fifth consecutive quarter of revenue and earnings growth, both of which beat analyst expectations.
The company also projected future sales growth.
Its November LaCroix orders were significantly ahead of those from the same month the year before, and the company was coming out with a new line of flavors.
As a result of these successes, shareholders had the privilege of watching their stock appreciate and also received the special dividend of $2.90.
This year, special dividends are not slowing down…
For example, Costco Wholesale (Nasdaq: COST) is feeling the holiday spirit and giving out an extra $10 per share dividend!
Costco has been able to distribute a special dividend in four out of the last eight years thanks to the company’s strong balance sheet and excess cash.
And Costco isn’t the only one!
CTO Realty Growth Inc. (NYSE: CTO) is giving out a whopping $11.83 per share, and its share price is only about $42.
That means you could make an extra profit of more than $100 with less than $400 of equity in the company.
Even if the stock fell 25%, you would still turn a profit thanks to the special dividend.
If you want to take advantage of special dividends, it’s important to pay attention to corporate actions.
If you see a company sell a large asset or release a blowout earnings report, a special dividend could very well be coming investors’ way.
Before making the surprise distribution, companies will announce it though a press release.
Once the special dividend becomes public knowledge, you can expect the stock to rise.
It’s crucial to note the company’s ex-dividend date. That’s the date on which investors must own the stock in order to collect the dividend.
Be sure to purchase the security before this date.
Next, make sure to consider the tax implications…
Dividends paid out of a corporation’s earnings and profits are taxed as dividends. However, dividends that aren’t paid from earnings and profits are considered return of capital.
Many special dividends are taxed as return on capital. That means shareholders won’t be taxed until they sell the stock.
Once you’ve found your special dividend candidate, sit back and wait to harvest that special dividend and pocket your profits!
It is no secret that the holiday season can cause financial stress and drain savings.
So this holiday season, protect your wealth and give yourself some extra cash by taking advantage of special dividends.