What Are Special Dividends?

Special Dividends Explained

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Special dividends are extra, one-time dividend payments that often come when a company has unexpected cash on hand.

What Are Special Dividends?

Special dividends usually take the form of cash and may be issued when a company has unusually strong earnings. Unlike regular dividends, which recur at regular intervals, a special dividend is separate from and does not increase the size of the regular dividend.

  • Alternate Names: One-Time Dividends
  • Extra Dividends

How Special Dividends Work

While special dividends are one-time payments, they are similar to regular dividends in that they are tied to how many individual shares are owned. To explain how they work, let's first explain regular dividends.

Regular dividends are usually quite predictable and are paid quarterly. The Coca-Cola Co., for example, paid 41 cents per share to investors every three months in 2020. This is up 1 cent from its quarterly dividend in 2019. Based on current share prices, that’s a yield of 3.11%, which is a relatively solid return.

The amount of a company’s dividend can vary, but usually does not change drastically from one payout period to the next. In the case of Coca-Cola, quarterly dividends have generally risen by only a cent or two each year.

The most financially sound companies have a history of paying dividends every quarter and increasing them on an annual basis as their revenues and profits grow.

Special dividends, meanwhile, should be treated completely different from regular dividends. They usually come when a company realizes it has a lot of cash on hand or has had an unusually strong earnings period. A special dividend is usually a one-time payment and may never be repeated. Thus, it should not be considered when calculating a company’s dividend yield.

Types of Special Dividends

Companies that have issued special dividends include Camping World, which announced a 77-cents-per-share special dividend in November 2020. While special dividends are usually a one-time occasion, the strength of the outdoor and recreational vehicle market during COVID-19 has lifted sales sufficiently to make multiple special dividends this year.

Australian mining company BHP made headlines in 2018 when it announced it would distribute $5.2 billion to shareholders in the form of a special dividend of $1.02 per share The company also bought back $5.2 billion of shares. The funds for the special dividend and buyback came from the sale of the company’s U.S. shale oil business.

Special dividends are common among Real Estate Investment Trusts (REITs), which are required to pay out most of their net earnings to shareholders.

Recent special dividends from REITs have included KBS, which made an extra distribution of $2.95 per share in 2018. Piedmont Office Realty Trust issued a 50-cent-per-share payment in 2017.

In some rare cases, such as Camping World, special dividends have been distributed more than once in a short period of time. A prominent example of this involved Ford Motor Co., which issued three special dividends over a 3-year span. It paid a special dividend of 55 cents per share in January 2016, followed by a 20-cent dividend a year later, then 28 cents in January 2018.

Special dividends can have their drawbacks and are not always met with universal praise

Disadvantages of Special Dividends

Special dividends can prove to be problematic for investors at tax time. Dividends from stocks held in taxable accounts are taxed at the normal income rate of between 10% and 37%, depending on your total income. 

While investors may be able to anticipate and plan for regular dividends, special dividends often come as a surprise and could result in a sizable, unexpected tax obligation.

Not everyone agrees that issuing a special discount is the right move for a company to make when it has a lot of cash on hand.

Instead, the company could use the cash to make acquisitions, invest in research and development or product lines, or simply keep it as a cushion for a rainy day. Some people also argue that extra cash should be used to pay workers bonuses or higher wages.

Some stock market observers contend that a special dividend could be a sign that a company has struggled to identify new investments or acquisitions.

In 2004, Microsoft announced a special dividend of $3 per share. While shareholders were happy to receive the extra cash, they also wondered why they were receiving money instead of seeing it go to expand the business. By issuing a special dividend, Microsoft may have sent a message to shareholders that it had not identified ways to generate more revenue and higher returns.

Key Takeaways

  • Special dividends are one-time dividend payments companies make when they have unexpected cash on hand.
  • They have no direct impact on the regular dividend price.
  • It's unusual for a special dividend to happen more than once, but on occasion it does.
  • Critics say companies that issue special dividends may be signaling they have nothing better to do with their money, such as invest in future growth.