Fear of falling off the fiscal cliff at year-end is prompting numerous companies to declare special dividends, an effort to avoid potential tax increases set to take effect January 1. Last month alone, 228 companies declared special dividends, an increase of 216% compared with the same timeframe one year ago.
Costco (COST), Ethan Allen Interiors (ETH), Las Vegas Sands Corp. (LVS) and Dillard's (DDS) are just a few of the companies taking advantage of the current 15% rate by announcing big payouts to shareholders. Failure to reach a compromise on the fiscal crisis will result in dividends getting taxed as ordinary income, which could climb as high as 39.6% next year.
Shares of many companies paying special dividends jumped following the firms announcements, providing a chance for investors to take advantage and position portfolios to benefit from the gains. Costco soared to a new 52-week high last week as investors scrambled to get a piece of the payout. The world’s largest membership warehouse chain declared a $7 dividend to anyone who owns shares as of December 10.
The special-dividend craze is far from over. “A record number of companies are announcing special dividends. More are coming. We’re going to see numbers we haven’t seen in years,” said Howard Silverblatt, S&P Dow Jones Indices Senior Index Analyst. “And it helps the stock too. It takes a big vote of confidence to announce a special dividend. Boards examine the numbers for months.”
And the one-time special dividend is not the only way companies are ensuring shareholders receive larger payouts. Some companies are simply accelerating the pay date of their dividends, bumping up next year’s scheduled payments ahead of the fiscal cliff deadline.
“We’re seeing an avalanche of companies accelerating payments of dividends,” said Silverblatt. “Some companies will hold out for the next week or two as Washington remains divided, but if nothing gets resolved, we’ll see a lot more companies announce.“
Software giant Oracle (ORCL) announced plans this week to accelerate second, third and fourth quarter cash dividend payments to December 21 while Disney (DIS) and Wal-Mart (WMT) each bumped up their dividend-payment dates from January to December.
So what happens next year when special dividends are no longer being handed out? Silverblatt says there’s no need to be alarmed, dividends will be just fine.
“The only way we wouldn’t have another record year in dividends would be to have a 6% cut, which won’t happen unless companies start cutting in bulk,” said Silverblatt. “Next year’s a no brainer; either the world falls apart or dividends have another great year.”
Those looking to invest in dividend-paying companies can allocate money to dividend-focused exchange-traded funds. There are several dividend-paying funds available to investors, and many generate high yields while keeping investment portfolios diversified.
A top choice among investors is the SPDR S&P Dividend ETF (SDY), attracting $52.4 million dollars over the past week according to Index Universe. SDY tracks the S&P High-Yield Dividend Aristocrats Index which is designed to measure the performance of the 50 highest dividend yielding companies from the S&P 1500 Index that have consistently raised dividends for at least 25 years in a row. The fund’s top holdings are Avon Products, HCP and AT&T.
Another option is the iShares Dow Jones Select Dividend Index Fund (DVY), which has a 12-month yield of approximately 3.5%. The fund is up more than 9% over the past year and offers investors exposure to large-cap stocks like Lockheed Martin, Kimberly-Clark and Chevron.
And the WisdomTree Dividend ex-Financials (DTN), which measures the performance of the 100 highest dividend-yielding companies in the WisdomTree LargeCap Dividend Index, has a 12-month yield of more than 4.5% and is up 6% so far this year. The fund’s top holdings are Frontier Communications, Southern Copper, Duke Energy, CenturyLink and AT&T.