Special dividends are extra, one-time dividend payments. They often come when a company has unexpected cash on hand. They should be treated differently from regular company dividends.
Learn how special dividends impact your taxes and why they might signal trouble.
Definition and Examples of Special Dividends?
Special dividends are payments to shareholders in a company. They usually take the form of cash and may be issued when a company has unusually strong earnings.
Special dividends are unlike regular dividends, which recur at regular intervals. They are separate from, and do not increase the size of, the regular dividend.
- Alternate names: One-time dividends; extra dividends
For example, in 2021 Dillard's announced a special dividend of $15 per share on its Class A and Class B common stock. The company framed the special dividend as a "special thanks to our shareholders."
How Special Dividends Work
Special dividends are one-time payments. They are similar to regular dividends in that they are tied to how many individual shares are owned.
Regular dividends are, for the most part, predictable and paid quarterly. The Coca-Cola Company, for example, paid $0.41 per share to investors every three months in 2020, up $0.01 from its quarterly dividend in 2019. Based on April 2021 share prices, that’s a yield of 3.15%, which is a relatively solid dividend.
The amount of a company’s dividend can vary but often does not change much 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 since 2013.
The most financially sound companies have histories of paying dividends every quarter and increasing the dividends on an annual basis as their revenues and profits grow.
Special dividends should be treated differently from regular dividends. They usually come when a company has a lot of cash on hand or has had an unusually strong earnings period.
A special dividend is often a one-time payment and might never be repeated. It should not be considered when calculating a company’s dividend yield.
Several companies have issued special dividends in recent years. For example, Camping World announced a $0.77 special dividend per share in November 2020. Special dividends are usually infrequent or one-time occasions. But the strength of the outdoor and recreational vehicle market in 2020 lifted sales sufficiently to make multiple special dividends that year.
In 2018, Australian mining company BHP announced it would distribute $5.2 billion USD to shareholders in the form of a special dividend of $1.02 USD per share. The company also bought back shares worth $5.2 billion USD. 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 $0.50 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 three-year span. Ford paid a special dividend of $0.25 per share in January 2016, followed by special dividends of $0.05 in 2017 and $0.13 cents in January 2018.
Disadvantages of Special Dividends
While getting extra money may seem like a good thing, there are drawbacks to the choice to issue special dividends.
Special dividends can cause problems 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.
Most investors can anticipate and plan for how regular dividends will impact their taxes. But special dividends often come as a surprise. This can result in a sizable, unexpected tax bill.
Even if a company has a lot of cash on hand, not everyone agrees that issuing a special dividend is the right move.
There are other important things a company could do with the extra money to grow or improve, such as:
- Make acquisitions
- Invest in research and development
- Create new product lines
- Increase wages or bonuses for workers
- Keep it as a cushion for a rainy day
A special dividend could be a sign that a company has struggled to find new investments or acquisitions. That could signal a future of poor growth.
In 2004, Microsoft announced a special dividend of $3.00 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 that it had not identified ways to generate more revenue and higher returns.
- Special dividends are one-time dividend payments that companies make when they have unexpected cash on hand.
- It's unusual for a special dividend to be issued more than once in a short period of time, although it does happen.
- Special dividends can create an unexpected tax burden for investors.
- Critics say that companies that issue special dividends may be signaling that they have nothing better to do with their money, which can indicate poor future growth.