What is a special dividend?

A special dividend is a one-time payment made by a company to its shareholders. Unlike regular dividends, which are typically paid quarterly or annually, special dividends are non-recurring and are often paid when the company has excess cash or has achieved extraordinary profits. Understanding what special dividends are and how they work can help you make informed investment decisions, especially if you are looking for a source of additional income.

1. What is a Special Dividend?

A special dividend is a one-time payment that a company makes to its shareholders, in addition to any regular dividends. Special dividends are typically paid when the company has excess cash, or after a major event like the sale of assets, a windfall profit, or a significant one-time business success. These dividends are usually larger than regular dividends and can be seen as a way for the company to share its unexpected profits or surplus funds with its shareholders.

2. Why Do Companies Pay Special Dividends?

There are several reasons why a company may choose to pay a special dividend:

• Excess Cash: If a company has more cash than it needs to run its business, it may decide to pay out some of this excess cash to shareholders in the form of a special dividend.
• One-Time Profits: Companies that experience an unexpected gain, such as the sale of a subsidiary or an asset, may pay out a portion of those profits to shareholders.
• Tax Considerations: In some cases, paying a special dividend may be a way for a company to reduce its taxable income, especially if tax rates are expected to increase in the future.
• Rewarding Shareholders: Companies may pay special dividends as a way to reward loyal shareholders or to enhance shareholder value in times of good financial performance.

3. How Are Special Dividends Different From Regular Dividends?

While both regular and special dividends involve payments to shareholders, there are key differences between the two:

• Frequency: Regular dividends are paid at fixed intervals (quarterly, semi-annually, or annually) and are expected to continue as long as the company remains profitable. Special dividends, on the other hand, are paid infrequently and are usually one-time payments.
• Size: Special dividends are often much larger than regular dividends. Companies may pay a special dividend to distribute a substantial amount of cash, typically in response to a windfall or surplus funds.
• Predictability: Regular dividends are predictable and are often based on the company's ongoing profits. Special dividends are unpredictable and depend on extraordinary financial events.
• Tax Treatment: Both regular and special dividends are taxed, but special dividends may have different tax implications depending on the size of the payout and the jurisdiction in which the company operates.

4. How to Invest in Companies That Pay Special Dividends?

Investing in companies that pay special dividends can be an attractive option for investors seeking a boost to their income. Here's how to find them:

• Look for Companies with High Cash Reserves: Companies that have a large amount of cash on hand and little debt are more likely to pay special dividends. Check their financial statements to assess their cash flow.
• Monitor Company Announcements: Companies typically announce special dividends along with their quarterly earnings reports or through press releases. Stay updated with these announcements to spot potential special dividend opportunities.
• Consider Industry Trends: Some industries, such as utilities and energy, are more prone to paying special dividends due to their cyclical nature and significant profits during certain times.
• Dividend-Focused ETFs: Some exchange-traded funds (ETFs) specialize in dividend-paying stocks and may include companies that pay special dividends as part of their portfolio. These funds can help you gain exposure to multiple dividend payers at once.

5. Tax Implications of Special Dividends

Special dividends are subject to taxation just like regular dividends. The tax rate may depend on factors such as the country in which the company is based and the investor's tax status. In some cases, special dividends may be taxed at a higher rate, especially if they are considered a capital gain. Be sure to consult with a tax professional to understand how special dividends will affect your tax liabilities.