Market Beat: Special dividends and the fiscal cliff
December 10, 2012
TRUCKEE, Calif. – A cash dividend is a quarterly payment paid out by a corporation. With today’s record low interest rates, dividends have become a very important source of income for many retirees.One thing that we are likely to see from the fiscal cliff negotiations is an increase in the tax rate on dividends. Currently all dividends are taxed at a rate of 15 percent, which is very attractive for income investors. For investors in the highest income tax brackets, the rate could go as high as 43.4 percent, and that will be a huge increase.As a consequence this year, more than 300 companies have declared a special dividend. A special dividend is a cash payment that will be made before the end of the year under the favorable tax rate. This is an excellent example of how changing tax laws alter behavior.Corporations are sitting on a ton of cash right now, more than $2 trillion, but not all are paying their special dividends from their cash hoard. Some have chosen to borrow the funds, or are using a combination of debt and cash.One example is Costco; its dividend is $7 per share, and it will amount to $3 billion. Costco is also one of the companies that has decided to borrow the cash to make the payment – it borrowed $3.5 billion, and its credit rating got downgraded as a result.Brown-Forman, which makes Jack Daniels, is paying out its special dividend with a combination of cash and debt. Its $4 per share dividend amounts to more than $800 million.An accelerated dividend is when the company decides to pay out future dividends now at the lower effective tax rate. One example is Oracle, which is going to pay out all of the dividends that it was planning to pay in 2013 early, before the end of this year.Other companies include Walmart, Best Buy, American Eagle Outfitters and Carnival Cruise Lines. The Washington Post is a well-known newspaper that is paying out a dividend of $9.80 per share; it too is accelerating all of its 2013 dividends into a payment this year.Investors who want to capture some of these special dividends need to purchase the stock before what’s known as the ex-date. The ex-date is the day the stock begins trading without the dividend and the stock price will be reduced by the dividend amount.Kenneth Roberts is a Truckee based Registered Investment Advisor. Information on his money management service can be found at his blog at http://www.sellacalloption.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.