What are Special Dividends?

Special dividends are one-time dividend payouts made by companies. While these payouts are often made by dividend paying stocks, there have been many instances where non-dividend paying companies paid a special dividend.

These one-time dividends range in amounts, some with very low amounts and some with very high amounts relative to the stock’s regular dividend. When a special dividend is announced, companies are careful to disclose that the dividend payout is special, and will have no impact on future payouts, or the stock’s annual yield.

Why Companies Pay Special Dividends

Companies pay special dividends for a variety of reasons. Typically, these payouts are used by cash-heavy companies who choose to reward investors instead of investing funds back into operations.

Special dividends are a way for companies to increase total dividends paid to investors, while eliminating the expectation of an increased dividend.

In addition, companies may also choose to pay a special dividend during a slow economic time, when investing in its business may not be ideal.

Capturing These Dividends

While dividends are meant to be ideal for long-term investors, many investors attempt to capture these payouts by buying the stock solely for the dividend, and then selling. While this is much harder said than done for regular dividends, it is even more difficult for special dividends.

With large dividend payouts, stock prices typically adjust so investors can not easily capture the dividend. For this reason, the dividend process for special dividends differs from traditional dividends. For example, the ex-dividend (which is typically the date an investor must own a stock by to be entiled to the dividend), comes after the dividend pay date.

The Costco Example

In late 2012, Costco (COST) offered investors an early Christmas present when it paid a $7.00 special dividend. Prior to this special dividend, Costco had done little to impress dividend investors, with a dividend yield around 1%.

However, in contrary to the explanation above on how companies use extra cash to pay special dividends, Costco actually borrowed $3 billion to pay its special dividend. In 2015, Costco followed up by offering another special dividend of $5.00.

While there is a chance that the company will pay another special dividend, the stock’s yield, which is just over 1%, remains unexciting for dividend investors.