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If you missed out on the rush of special dividends in 2012 or simply want to reap further rewards, there's still time to cash in.
That's because even if a fiscal cliff deal is reached, tax rates on dividends will probably still increase. If you add in the investment surtax included in U.S. President Barack Obama's healthcare bill, the top tax rate on dividends could almost triple next year, from 15% to 43.4%.
That is why companies are looking to help out investors in the way of special dividends in 2012.
"Tax rates on dividends are never going to be better," said Steve Joyce, CEO of Choice Hotels International Inc. (NYSE: CHH), on its last earnings call. "I don't know how much worse they are going to get, but they are going to get worse."
Special Dividends in 2012
Special dividends offer investors the chance to cash in on a large dividend payout before it's taxed at a higher rate, plus investors will enjoy higher share prices as special dividend-paying stocks get a bump from the news.
More than 420 special dividends have been announced just in November and December, which will soon exceed the 433 paid in all of 2011, according to S&P Capital IQ.
And it's not just special dividends that are helping investors - regular dividends are being altered as well.
Wal-Mart Stores Inc. (NYSE: WMT) announced its fourth-quarter dividend payout, originally scheduled for Jan. 2, will be paid on Dec. 27, and Costco Wholesale Corp. (Nasdaq: COST) and Oracle Corp. (Nasdaq: ORCL) also moved up their first 2013 dividend payments.
Costco not only paid out its first dividend of 2013 in December, it also issued a $7 per share special dividend, totaling $3 billion, to be paid on Dec. 18.
Wynn Resorts Ltd. (Nasdaq: WYNN) was another company in the past two months to announce a special dividend. Along with Wynn's $750 million dividend, some of the biggest payouts have been Brown-Forman Corp's (NYSE: BF.B) $853 million payout, a $1.1 billion payout by HCA Holdings Inc. (NYSE: HCA) and a $1.6 billion dividend by LyondellBasell Industries NV (NYSE: LYB).
Dozens of other companies have also rewarded shareholders.
"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."
So where can investors find the next payout?
How to Find Final Special Dividends in 2012
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.
Since we first named special dividend candidates of 2012 on Nov. 19, three of those - Las Vegas Sands Corp. (NYSE: LVS), Paccar Inc. (Nasdaq: PCAR), and Limited Brands Inc. (NYSE: LTD) - have announced special dividends.
But, 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:
- International Business Machine Corp. (NYSE: IBM)
- Amazon.com Inc. (Nasdaq: AMZN)
- MasterCard Inc. (NYSE: MA)
- Stryker Corp (NYSE: SYK)
- Nordstrom Inc. (NYSE: JWN)
- W.R. Berkley Corp. (NYSE: WRB)
- Williams-Sonoma Inc. (NYSE: WSM)
- Robert Half International Inc. (NYSE: RHI)
- Stamps.com Inc. (Nasdaq: STMP)
- Artio Global Investors Inc. (NYSE: ART)
"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."
Related Articles and News:
- Money Morning:
These Special Dividends in 2012 Help Investors Beat the Fiscal Cliff
- Money Morning:
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- Money Morning:
Five Ways to Turn the Fiscal Cliff Into an Outstanding Investment Opportunity
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- The Wall Street Journal:
Stock Pickers Game the Fiscal Cliff
- Bloomberg News:
Special Dividends Surge Fourfold as U.S. Tax Increase Looms