These Special Dividends in 2012 Help Investors Beat the Fiscal Cliff

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If the fiscal cliff goes into effect and the president's healthcare bill is upheld, the dividend tax rate could triple next year – which is why companies are looking to help out investors in the way of special dividends in 2012.

Since the end of September to mid-November, 59 companies in the Russell 3000 stock index announced a one-time special dividend, up from about 15 in the same period last year.

And it's not just special dividends that are helping investors – regular dividends are being altered as well.

Wal-Mart Stores Inc. (NYSE: WMT) just announced its fourth-quarter dividend payout, originally scheduled for Jan. 2, will now be paid on Dec. 27.

"It's a foregone conclusion the rates are going up — it's just a matter of how high they go," Todd Lowenstein, a Los Angeles-based money manager with HighMark Capital Management Inc. told Bloomberg News. "When you know that 15% tax rate is going away and you have excess cash buildup, it makes sense to return some of it back to shareholders now."

As things currently stand, the top tax rate on dividends will go from 15% to 43.4% at the end of the year, causing companies to seriously consider offering a special dividend.

Special dividends offer investors a "twofer": Besides collecting a large dividend payout before it's taxed at a higher rate, investors will enjoy higher share prices as special dividend-paying stocks get a boost from the news.

So where can investors find these special dividends?

Where to Look for Special Dividends

Wynn Resorts Ltd (Nasdaq: WYNN) was one of the many companies in the past month to announce a special dividend. Along with Wynn's $750 million dividend, HCA Holdings Inc. (NYSE: HCA) issued a $1.1 billion dividend payout and LyondellBasell Industries NV (NYSE: LYB) declared a $1.6 billion dividend.

Choice Hotels International Inc. (NSYE: CHH), AOL Inc. (NYSE: AOL), DSW Inc. (NYSE: DSW), Homeowner's Choice Inc. (NYSE: HCI), Sinclair Broadcast Group Inc. (Nasdaq: SBGI) and American Eagle Outfitters (NYSE: AEO) have also issued special dividends so far.

"It's like a nice end-of-the-year gift," Jay Wong, a Los Angeles-based portfolio manager for Payden & Rydel, a money manager that manages $75 billion told The Wall Street Journal. "We anticipate that some others will probably issue special dividends before the end of the year, when they get a better sense of what's going to change in the tax structure and they assess their financial health."

Narrowing down your search for potential special dividend-paying companies can be difficult, but having some guidelines will help. Here are some characteristics of the most likely special dividend payers:

  • Insiders own 25% of shares outstanding.
  • Free-cash-flow yield is greater than 5%.
  • Debt-to-equity ratio is less than 30%.
  • The company has announced special dividends in the past.

The Latest Contenders for Special Dividends in 2012

Buying a stock on hopes of a special dividend alone can be pretty risky and investors should make sure the company shows potential even without the payout.

For those who want to take a bit of a chance, here are ten contenders for special dividends listed in terms of market cap from largest to smallest:

  • Microsoft Corp. (Nasdaq: MSFT)
  • International Business Machine Corp. (NYSE: IBM)
  • MasterCard Inc. (NYSE: MA)
  • Las Vegas Sands Corp. (NYSE: LVS)
  • Stryker Corp (NYSE: SYK)
  • The Gap Inc. (NYSE: GPS)
  • Paccar Inc. (Nasdaq: PCAR)
  • Williams-Sonoma Inc. (NYSE: WSM)
  • Patterson Companies Inc. (Nasdaq: PDCO)
  • Stamps.com Inc. (Nasdaq: STMP)
  • Extra: Limited Brands Inc. (NYSE: LTD)- already issued one in 2012, but in 2010, the last time the dividends tax could have changed, it issued two special dividends before the end of the year.

Besides these companies, in general there should be a high amount of special dividends issued this quarter as companies try to lessen the impact of next year's tax changes.

"Tax rates on dividends are never going to be better," said Steve Joyce, CEO of Choice, on its last earnings call. "I don't know how much worse they are going to get, but they are going to get worse."

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