How Does Special Dividend Work?
Thousands of investors in the USA are looking for dividend-paying stocks. The reason is that they give you additional income. Briefly speaking, dividends are helping tools, which provide you with the ability to make more money on a regular basis and forget about money problems with refusing quick 100 dollar loan and starting to manage money correctly.
A dividend is a portion of a corporation’s earnings that goes to its shareholders. In addition, there are special dividends, which, generally, are much bigger than ordinary ones. Therefore, let’s go deeply into the ocean of special dividends!
What Are Special Dividends?
Firstly, the term “special dividends” means a one-time allocation of the corporation’s assets to shareholders. Typically, this type of dividend gives you money as cash.
As a rule, they allow you to receive more money in comparison with common dividends. Nevertheless, special dividends don’t appear often enough.
Only if a company understands that it has a significant amount of surplus cash, it can create these dividends and spread among its shareholders. Moreover, special dividends are considered to be a rarity in the business world and, in most cases, they happen no more than one time in the history of the company. However, such unusual situations occur.
You may have encountered terms like “one-time dividends” or “extra dividends”. These are alternative names for special dividends. You can simply confuse conventional and special dividends. However, it is essential to know at least one main difference. First of all, dividends are about paying more regularly in contrast to a special type that gives a chance to earn money just one time.
On 25 February 2014, the Board Meeting recommended the declaration and payment of a special dividend of US$0.1147 named Special Dividend and endorsed a New Dividend Policy.
Examples of Special Dividends
The first example of a special dividend is Red Bull GmbH. It distributed 500 million euros in a special dividend for 2017. The Austrian company of caffeinated energy drinks had a remarkable year. It sold more than 6 billion tin cans and got 6.3 billion euros as income.
Below you can see how many Red Bull cans were sold globally between 2011 and 2021. It is clear that each year the quantity of sold products grew. The biggest jump Red Bull GmbH experienced in 2021, selling 9.8 billion cans.
The second good instance is Costco (NASDAQ:COST). As of November 2020, Costco was paying an ordinary dividend of 70 cents per quarter. But, it proclaimed that it would pay a special dividend of $10 a share in December.
The special dividend resulted in an overall cost to Costco of $4.4 billion. April 2021 was the month when the company raised its regular quarterly dividend as well from $0.70 to $0.79 per share. Costco is a solid company that has been growing its revenues for years.
Reasons to Get Special Dividends
Some companies don’t understand the importance of special dividends and consider it as spending a big portion of money without any sense. Here presented 5 main reasons to get special dividends.
1. Distribute the additional liquid assets available in the balance sheet. In the case where there is a great deal of money in a company’s balance sheet and at the same time it doesn’t decide to reinvest the cash in the firm. Members of this organization have the option to distribute the money through special dividends.
2. Assets = Debts + Equity. A special dividend can be used to change the capital structure of a corporation through a reduction in equity and assets. By paying a special dividend, the company modifies the debt ratio in relation to the capital ratio used to finance the company.
3. To attract current & possible investors. For people a special dividend is about receiving more money, while the company considers it as an instrument to attract more investors. At times when firms face perfect periods, they frequently find themselves with a surplus of capital. Excess capital means money that is not required for day-to-day operations and is superior to what the company is prepared to invest in future growth. In this way, that amount of money may be used to pay special dividends for the company’s shareholders. Hence, investors will be interested in the company, because of the possibilities to boost revenue.
4. One-time flow of money. Lots of businesses can face the flow of more money than usual due to different factors. They can think of giving money as special dividends to shareholders.
5. To make a special signal. – Special dividends provide companies with the opportunity to tell the market about it in an awesome way and, as a result, put the company in a great position. Thereby, special dividends make this important sound to the market, which gives insight into the economical part of a company. What’s more, paying special dividends means that this company has successful future perspectives. That is how it works!
Pitfalls You Can Face
You have to grasp that even something that goes with many benefits has its own drawbacks. In this case, it’s a necessity to be informed about the dark side too.
The most obvious pitfall is that you can spend your money paying special dividends and unexpectedly find your company in need of money one day. These poor financial situations can be caused due to a variety of reasons. For example, sudden fire, disasters or theft.
The second pit in which you may fall is that by making a special dividend payment, the cost of the shares is immediately decreased by the amount of that payment.
Additionally, there are investors who see special dividends as a sign that the issuing company has exhausted the expansion possibilities of the company. Finally, by paying special dividends you can lose some part of your investors. Taxes for the investor are another pitfall. Dividends are the only form of income that the IRS imposes in double taxation. The company pays tax on its net income every year, and then you’re required to pay tax on dividends when they come into your account.
Good to know: Tax rates may be as high as 20% for eligible dividends and may be even higher for non-eligible dividends.
Do you think that you will be able to reinvest the dividends in the light speed and taxes will disappear? Don’t trick yourself! You will still have to pay tax at the end of the year.
Summing Up
Special dividends are incredible tools that help investors as well as companies, which make them. Nevertheless, there may not be much point in trying to focus your investments on companies that pay special dividends, because sometimes special dividends can be a signal of trouble.
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