Ever collect a 22% special dividend?
If you're looking for dividends, there's one group of
companies that will NEVER appear on any screen or list - and
you'll miss out on the biggest dividends in the market.
I'm referring to companies that actually pay a dividend that's
two, three, four, and even seven times the stated dividend rate.
Most investors are unaware of these companies, because the
yield and payment rate aren't posted on the popular financial
websites. You could screen one of these companies and believe
they offer a 1% or 2% dividend yield, when they actually offer a
5% or 6% yield - or more.
Special dividends were a hot topic last year. Many companies
front-loaded their dividend payouts to avoid the possibility of
the qualified-dividend rate of 15% reverting to the higher
marginal income-tax rate.
Special-dividend payers wanted to get money to their investors
so that the investors could avoid a higher tax.
Fortunately, the qualified-dividend tax rate rose only on the
high end of the income curve. For wealthy investors, the
qualified-dividend tax rate rose to 20%. Now that we know what
the qualified-dividend tax rate is going forward, most of the
companies that paid special dividends last year won't pay one
Special dividends are a good idea in general, but might not be
a good deal for income investors. These one-off distributions
shouldn't be interpreted as a sustainable, high-yield dividend
That said, there are a few companies that continually pay
special dividends year after year.
Dish Network (
, for one, has paid a special dividend each year since 2008. Last
year, Dish paid a $1.00 per share special dividend. In 2011 and
2010, it paid a $2.00 per share special dividend.
But if you screen for Dish on Yahoo! Finance, it appears to be
a non-dividend paying stock, even though Dish yielded 6% in 2011
and 3% in 2012.
A more striking example is found in
Neutral Tandem (
. This Ethernet interconnection provider is shown to yield 4.7%
based on its $0.25 annual dividend. Last year, Neutral
Tandem issued a special $3.00-per-share dividend. This month it
issued a $1.00 per-share special dividend.
That means Neutral Tandem actually yields 22%
- more than four times the stated yield.
You might be curious to why companies that pay a recurring
special dividend don't incorporate the special dividend into the
regular dividend policy.
Many companies, for legitimate reasons, don't want to commit
to paying regular dividends. If a company has meaningful
investment opportunities with uncertain timing, flexibility, low
debt ratios, and higher cash balances are desirable.
For a stable company, whose investment opportunities are
limited or appear with regularity, a dividend is
appropriate. But if cash flows are variable and excess cash
is an anomaly, committing to an unsustainable regular dividend
payout will do more harm than good.
Other companies, for whatever reason, just pay the special
dividend - and have done so for years - but simply don't
incorporate the dividend into their official policy, even though
the special dividend is as dependable as the stated
High Yield Wealth
portfolio includes such an investment. This dividend-paying
energy company has a stated dividend of $0.50 per share and 0.7%
yield that most income investors would ignore.
Because of the special dividend, though, this company actually
pays $3.50 per share in dividends - seven times the stated rate,
which produces a more enticing (and remunerative) 5.2% yield.
There are currently two stocks with a long record of paying
special dividends on the short-list to become new
High Yield Wealth
One is a consumer products company, with a 1.4% yield based on
the stated dividend rate. When the recurring special dividend is
factored in, the yield is actually 8.5%.
The other is a mining/natural resources company with a 4.5%
yield, but when the recurring special dividend is included, the
yield surges to above 8%.
In recent months, I've been warning
High Yield Wealth
subscribers that value in dividend-paying stocks is becoming
increasingly difficult to come by. The good news is I'm finding
nuggets of value in a couple special-dividend gems.
In this market, hidden income can be a good thing as some
companies are forced to lower or eliminate dividends - others
will still pay out their special dividends and most people will