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Should You Care About Special Dividends?

December 05, 2012 | About:
As a dividend investor, I’m obviously very concerned about the fiscal cliff and the impact it might have on taxes, especially taxes on dividends and capital gains. It could end up giving companies less incentives to pay back their shareholders through dividends. Some of them are trying to act before that happens and announcing special one time dividends. Giant retailer Costco for example was quick to announce a special $7 dividend. To give you an idea, Costco (COST) has recently been paying $0.275 per share every quarter. To say that there was a major jump would be an understatement.

costco.jpg

Of course, it’s a special dividend. Why? The end of the year is generally when such payouts occur because companies want to pay out extra cash. Even by those standards though, this year is seeing a lot of activity. It’s hard to think that Obama is not part of the reason why.

When Costco announced its dividend, the stock jumped with investors showing how they approved the move.

Time For Me To Buy Costco?



I personally have exactly the same opinion about Costco as I did. Why? My USDP portfolio is built on long term, sustainable dividend growth. While getting a $7 payout would be nice, the stock’s value will decline by that much (all else being equal). I don’t think that Costco paying this much makes it any more likely to pay out more in the future. In fact, it might be the opposite.

Here Is When I WOULD Care About Special Dividends



I would not buy a stock simply because it has announced a special dividend. That being said, if a company that I currently hold (especially in the USDP), then that is obviously good news as it will make it possible for me to increase my positions by reinvesting that dividend. That being said, I would still want to make sure that it does not change their longer term dividend policy.

Research Might Differ With Me



Credit Suisse research seems to indicate that while such stocks gain 1% on average when they announce the dividend, they also tend to outperform in the following month (by 1.2% on average). That certainly makes me curious. One explanation could be that companies would not go for this if they didn’t believe their underlying business was very strong.

Who Has Announced A Special Dividend?



There are already several including some names held in the USDP:

-Murphy Oil Corp (MUR) $2.50

-Carnival Corp (CCL) $0.50

-Franklin Resources (BEN) $3.00

Many Others Could Potentially Join That Group



Those include

-Wallgreen (WAG)

-Microsoft (MSFT)

-Yahoo (YHOO)

-Dell Inc (DELL)

Do you care about special dividends? Hold any stocks that are paying some or looking to acquire stocks that will?


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