‘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.
Full story on WealthyRetirement.com