| NEW YORK
NEW YORK Nov 28 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
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
The reason: on Jan. 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
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 Oct. 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 Nov. 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
* 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
"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."