What Are Special Dividends?

Pile of Cash Dividends for Income Investors
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One of the nice things about being a stock investor is the potential to receive dividends. These are portions of earnings that companies make directly to shareholders for every share they own. Over time, dividends can be a great source of passive income, or they can be reinvested to purchase more shares.

Even better than normal dividends, however, are special dividends that often come unannounced. These are extra, one-time dividends that often come when a company has extra cash on hand.

Special dividends can be a great source of additional return for shareholders, but they can have their drawbacks and are not always met with universal praise.

Regular vs. Special Dividends

Regular dividends are usually quite predictable and are paid quarterly. Coca-Cola, for example, currently pays 40 cents per share to investors every three months. Based on current share prices, that’s a yield of more than 3.4%, which is a relatively solid return.

The amount of a company’s dividend can vary, but usually does not change drastically from one payout period to the next. In the case of Coca-Cola, quarterly dividends have generally risen only by a cent or two each year.

The most financially sound companies will have a history of paying dividends every quarter and increasing them on an annual basis as their revenues and profits grow. (Coca-Cola has paid and increased its dividends for 55 consecutive years.)

Special dividends, meanwhile, should be treated completely different than regular dividends. They usually come when a company realizes it has a lot of cash on hand or has had an unusually strong earnings period. A special dividend is usually a one-time payment and may never be repeated. Thus, it should not be considered when calculating a company’s dividend yield.

Special dividends can prove to be problematic for investors at tax time. Dividends from stocks held in taxable accounts are taxed at a rate of between 10% and 37%, depending on your total income. While investors may be able to anticipate and plan for regular dividends, special dividends often come as a surprise and could result in a sizable, unexpected tax obligation.

Special Dividend Examples

Prominent companies that have issued special dividends include Camping World, which provided shareholders with an extra 7 cents per share in March of 2019; and mining company Rio Tinto, which paid $2.43 per share to investors in February.

Australian mining company BHP made headlines in 2018 when it announced that it would distribute $5.2 billion to shareholders in the form of a special dividend. The company also bought back $5.2 billion of shares. The funds for the special dividend and buyback came from the sale of the company’s U.S. shale oil business.

Special dividends are common among Real Estate Investment Trusts (REITs) which are required to pay out most of their net earnings to shareholders.

Recent special dividends from REITs have included KBS, which made an extra distribution of $2.95 per share in 2018, and Piedmont Office Realty Trust, which issued a 50-cent per share payment in 2017.

In some rare cases, special dividends have been distributed more than once in a short period of time. The most prominent example of this is that involving Ford Motor Company, which issued three special dividends over a three-year span. It paid a dividend of 55 cents per share in January of 2016, followed by a 20-cent dividend a year later, then 28 cents in January of 2018.

Opinions on Special Dividends

Special dividends often come when a company has a lot of cash on hand. But not everyone agrees that issuing a special dividend is the right move.

A company with a large amount of cash on hand could use it to make acquisitions, invest in research and development or product lines, or simply keep it as a cushion for a rainy day. Some people also argue that extra cash should be used to pay workers bonuses or higher wages.

No matter what a company decides to do, there will be people who argue it should have acted differently.

Some stock market observers contend that a special dividend could be a sign that a company has struggled to identify new investments or acquisitions.

In 2004, Microsoft announced a special dividend of $3 per share. While shareholders were happy to receive the extra cash, they also wondered why they were receiving money instead of seeing it go to expand the business. In other words, by issuing a special dividend, Microsoft may have sent a message to shareholders that it had not identified ways to generate more revenue and higher returns.

If a company has a pile of extra cash, it may distribute it to shareholders in the form of a special dividend.