Is it too late to grab some special dividends?

NEW YORK Wed Nov 28, 2012 4:24pm EST

Related Topics

NEW YORK (Reuters) - With Wednesday's announcement that it will pay a special dividend of $7 per share, Costco Wholesale Corp is the latest company to boost payouts in an attempt to get ahead of any possible tax increases next year.

In some cases, companies are simply advancing money that might ordinarily have been paid to shareholders in 2013. In other cases, like Costco's, they are making extra dividend payments.

The reason: on January 1, with the expiration of the George W. Bush-era tax cuts, the tax rate on dividend income could rise sharply. Without any congressional action, dividend income is slated be taxed as ordinary income, as opposed to the current rate of 15 percent. Coupled with a new 3.8 percent Medicare tax on high earners, the top rate on dividends would reach 43.4 percent in 2013.

Among the companies that have pushed through special year-end dividends are spirits company Brown-Forman Corp, casino company Las Vegas Sands, Wal-Mart Stores and Ethan Allen Interiors.

Analysts expect to see more companies join this list soon. The new few weeks will be "the last call at the bar depending on what Congress decides to do," said Howard Silverblatt, senior index analyst at Standard & Poor's.

For investors, the dividend spree raises several questions: Is it too late to buy into dividend-paying companies in the hope of catching these special payouts? Should investors sell companies that are accelerating their 2013 payouts on the theory that the companies will be less rewarding next year?

"On the surface, this is great," says Paul Rubillo, founder of the Dividend.com website and developer of a dividend-stock rating system. "It keeps investors from having to pay higher taxes. But I don't know if there are going to be long-term benefits."

Some of the benefits may be short-lived, leaving stock prices tumbling after a company pays the special dividend, Rubillo said. Shares of casino operator Wynn Resorts Ltd rose $8.19 to $120.48 on October 25, the day after the company announced it would pay a special $7.50 a share dividend (on top of its regular $0.50 payout). The stock peaked at $122.90 a week later.

Once Wynn Resorts went ex-dividend, owners of record had locked in their dividends and could sell - they did. The stock fell to $104.33 by November 16 and is now trading at $109.25, below the price when the company announced its dividend.

Individual investors should proceed with caution. Here are some tips.

* Don't forget the holding period, reminds Charles Rotblut of the American Association of Individual Investors. To qualify for the 15 percent dividend tax rate, shareholders cannot buy and then immediately sell a stock. They must own the stock for at least 61 days around the so-called ex-dividend date.

* Try to guess the next company to jump. Investors who want to be more "traderesque" - in Rubillo's parlance - may try to buy companies now that are more likely to push those payouts.

Spotting them is easier said than done. Don Taylor, a portfolio manager for the $8.5 billion Franklin Rising Dividends fund (FRDPX), said that U.S.-focused companies like retailers, insurers and grocers are the most likely to announce special dividends because most of their profits are already subject to U.S. taxes.

"One of the problems with companies with very strong balance sheets is that if the cash is overseas, you don't want to bring it home because of corporate tax rates," he said. Global technology and industrial firms are less likely to announce additional payouts, he said.

Companies with high rates of insider ownership are strong candidates, said S&P's Silverblatt. "It's an easier decision to make when it hits home right away," he said.

Companies that have a lot of cash on hand, a payout ratio of less than 40 percent and board members who themselves hold a lot of shares may also be worth considering.

A lack of faith in Washington's ability to keep tax rates low next year could be another telling sign - Las Vegas Sands, which announced a special dividend on Tuesday, has Republican party mega-donor Sheldon Adelson as its chairman.

* Don't get too excited about one-offs. Long-term investors should focus instead on companies that are able to raise their dividends consistently, said Rick Helm, a portfolio manager of the $234 million Cohen & Steers Dividend Value fund. Because these companies manage their balance sheets with payouts in mind, they tend to have higher valuations and are more stable over time than comparable firms, he said.

* Finally, don't spend too much time with the balance sheets and tea leaves.

"You're down to four weeks here (until the end of the year)," says Rubillo. "Time is not on your side."

(Reporting by Linda Stern and David Randall. Editing by Lauren Young.)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.