Investors who have reaped the benefits of putting their money in dividend-paying stocks over the years know how special the benefits can be. After all, nearly 40 percent of the long-term total return of the stock market has come from power of dividends.
However, with the rapidly approaching fiscal cliff on the horizon, a lot of companies are making plans to do something even more special — pay a one-time dividend to shareholders before the end of the year in order to take advantage of the current reduced tax rate.
Qualified dividends are now taxed at a maximum rate of 15 percent. That could change at the start of 2013 if tax cuts are allowed to expire. Dividends would then be taxed as ordinary income, as high as 43.4 percent.
Since companies are sitting on nearly $2 trillion in cash it makes certain sense to get the money to shareholders with a special dividend. Standard & Poor’s noted two year ago, when it looked like the tax the tax break would expire, 281 companies issued bonus dividends and more are expected to do the same this year.
For instance, Wynn Resorts announced last week it will pay a special dividend of $7.50 per share in November. The payment is above the normal dividend of 50 cents paid to investors each quarter.
Progressive, the auto insurance company, also announced it will pay its shareholders a special $1 dividend in November. CEO Glenn Renwick said, “We are pleased to return approximately $600 million to our shareholders through this special dividend. This action is consistent with our published policy of returning capital to our shareholders when appropriate. The combination of strong operating and investment results allow us to pay a special dividend at this time.”
Shareholders of Apple stock will also be getting an early Christmas present this year. A special dividend of $5.15 a share will be paid on December 14 as part of a plan to return as much as $1.1 billion to shareholders through a major stock repurchase program, a regular quarterly dividend and this special payment.
Interestingly, Apple CEO Tim Cook said that he will not accept the special dividend on the thousands of shares of stock he owns.
Special dividends — and dividends in general — are often a sign of a healthy company. In order to pay a dividend a company needs to have the adequate cash flow to not only reward shareholders but also fund the ongoing operations.
While dividends in general have been on the rise for the last few years there is still plenty of money to be distributed to shareholders. The current payout ratio — the percentage of net profits distributed through dividends — historically averages 52 percent. However, the current ratio is just 34 percent.
“While companies are paying out record amounts, they are not being generous or even distributing near their historical payout rate. It’s not a matter of companies being cheap. It’s a matter of them being nervous about the economy and their resources, much like the rest of us,” said Howard Silverblatt, senior analyst at S&P Dow Jones Indicies.
The money is there, taxes are likely to go up next year, and more companies will probably pay out special dividends before the end of the year.
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