Look to Special Dividends for Extra Holiday Cheer

‘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…

1. 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.
2. 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.
3. 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.

Full story on WealthyRetirement.com