What Is a Special Dividend?
A special dividend is a non-recurring distribution of company assets, usually in the form of cash, to shareholders.
A special dividend is usually larger compared to normal dividends paid out by the company and is often tied to a specific event like an asset sale, corporate restructuring, spinoff, or other windfall-generating event. Special dividends are also referred to as extra dividends.
Key Takeaways
- A special dividend is a non-recurring distribution of company assets, usually in the form of cash, to shareholders.
- Most special dividends are larger than the normal dividends paid to shareholders and are tied to a certain event.
- Special dividends can also occur when a company wishes to make changes to its financial structure or spin off a subsidiary company to its shareholders.
- Most companies don't make more than one special dividend in their history.
- Though a boon to investors, special dividends have some drawbacks, such as a reduction in the share price and sometimes the perception of a company lacking in growth potential.
Understanding a Special Dividend
Special dividends are usually declared after exceptionally strong company earnings results as a way to distribute the profits directly to shareholders. Special dividends can also occur when a company wishes to make changes to its financial structure or spin off a subsidiary company to its shareholders.
A special dividend is usually a one-time payment and a company most often does not experience many special dividends. Special dividends also have some drawbacks, such as reducing the share price of the company by the dividend amount. If an investor then sells their shares directly after the dividend payment, at the lower price, they will cancel out the benefit of the special dividend.
Some investors also believe that if a company issues a special dividend it is lacking in new growth opportunities for the future and, therefore, may lose confidence in the stock.
One of the most famous special dividends was by Microsoft in 2004. The company issues a dividend at $3 per share, for a total of $32 billion. Its normal dividend was $0.04 a share.
Special Dividends and Traditional Dividends
While a special dividend is non-recurring, traditional dividends are usually more regular (e.g., monthly or quarterly). A company’s board of directors makes the decision to issue dividends over specific timeframes and payout rates. These could be in forms such as a stable dividend policy, target payout ratio, constant payout ratio, or residual dividend model.
Startups and other high-growth companies offer dividends more rarely than established companies, such as those in basic materials, oil and gas, banks and financial, healthcare and pharmaceuticals, and utility industries. Software companies, for example, often report losses in their early years and must return any profits back into their business to sustain their expansion.
In contrast, larger and older companies with more predictable profits tend to issue regular dividends in order to maximize shareholder wealth. Companies structured as master limited partnerships (MLPs) and real estate investment trusts (REITs) are considered top dividend payers. Companies that add a special dividend to their schedule are signaling their confidence in the business and declaring that they will continue to be able to create value for shareholders without holding on to excess cash.
Examples of Special Dividends
For example, in 2017, Red Bull GmbH distributed 500 million euros ($617.3 million) in a special dividend. This was in addition to 263.4 million euros that the Austrian company paid out in regular dividends in 2016. Red Bull had an impressive year, selling greater than 6 billion cans of its caffeinated energy drink, bringing in 6.3 billion euros in revenue. So the special dividend was created out of stronger than expected operations for the fiscal year.
Events outside of the operating performance of a company may also result in a special dividend. In 2018, the North Carolina-based financial firm BB&T announced a special dividend to shareholders with a portion of the money it projected it would save from the reduction in the corporate tax rate. BB&T paid a non-recurring, one-time dividend of $0.045 cents per common share on March 20, 2018. The special dividend was in addition to the firm’s regular $0.33 per common share dividend paid on March 1, 2018.
As a more recent example, in 2022 EOG Resources, Inc., an energy and natural resources company, announced a special dividend of $1.50 per share worth $1.1 billion.
Why Do Companies Pay Special Dividends?
Companies may elect to pay out a special dividend to distribute windfall profits, from a restructuring, or to reward shareholders. By declaring a special dividend, a company can also signal to the market that its financials are sound and has good growth prospects.
What Are the Downsides of Paying a Special Dividend?
For companies, a special dividend can drain them of cash that may have been used for better opportunities, such as expansion or investment. If the company's prospects turn negative, that cash may have also helped provide a cushion.
How Are Special Dividends Taxed?
Special dividends, whether paid out as cash or stock, can be taxed as a capital gain distribution to stockholders but portions of a special dividend may be taxed as ordinary income instead. This will vary depending on how the special dividend is structured and the company paying it.
