Breakout

Just How Special Are Special Dividends?

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A bird in the hand is worth two in the bush, the old saying goes. But when it comes to companies declaring special dividends, that may not be the case. While no one on Wall Street will turn their nose up at any form of money, a recent spate of these one-time payments to shareholders has sparked renewed interest in the topic.

"It's a nice thing for investors," says Rex Macey, chief investment officer for Wilmington Trust, "but it's not a reason to make an investment." As he explains in the attached video, for his money and that of his clients, a steady recurring dividend is far more valuable and beneficial over the long term. And besides, he says, one-time payouts typically are just that and don't lead to much more.

Costco (COST) became the latest company to join the ranks of businesses relieving themselves of their cash. Just today it declared a $7 per share one-time dividend that will cost it $3 billion once it's paid out on December 18.

Of course, the catalyst for all these sudden payouts is the probability that the current 15% tax rate on dividends will revert to the ordinary income rate come January 1, depending on how (and if) Congress negotiates a solution to the fiscal cliff. As a result, The Wall Street Journal reports, there's been a huge uptick in special dividends, particularly by closely held companies in which management has a large personal stake. It's a scenario that some consider to be little more than a self-reward, as a good chunk of the company's money would flow directly into their own pockets.

For Macey, however, the dividend process is far less sinister and, in the vast majority of cases, serves as a "very strong message from management" that they care about shareholders. "Ultimately you do want companies to pay dividends," he says, particularly given the growth of so-called cash-rich companies, such as Apple, that many feel are hoarding cash unnecessarily. "If you don't have anything better to do with it, don't sit on it," he says, adding that his retired clients not only want income, but growing income that can also keep up with inflation.

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