What's With All the Special Dividends?

Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Absent last-minute action from the United States Congress, American shareholders are likely to see their dividend taxes increase sharply on the first day of 2013. The change closes a decade-long period during which the U.S. government taxed dividends at a significant discount to regular income. 

As part of the second round of "Bush tax cuts" in 2003, dividend taxes for the country's top earners shrank to 15 percent from about 40 percent. On January 1, they are slated to revert to the pre-2003 rate. The culprit for this change is a haphazard budget agreement worked out in response to the country's near-default in the summer of 2011. 

To prevent the country from exceeding its self-imposed borrowing limit and further damaging its already wounded credit rating, federal lawmakers agreed to allow a slew of semi-permanent tax breaks and discounts to expire at the end of 2012. The deal outlined increases to marginal income tax rates on virtually all of the country's workers as well as to the payroll taxes that fund entitlement programs like Medicare and Social Security. It also called for increases to tax rates on long-term capital gains in addition to regular dividends. 

At the time, it was assumed that the terms of this deal would eventually be changed to protect some of the more popular tax breaks. In fact, it's almost certain that marginal tax rates on poor and middle class Americans won't be allowed to increase as currently scheduled. 

However, negotiations on forestalling this so-called "fiscal cliff" are stuck on the issue of whether to permit rates to increase for Americans who earn more than $200,000 per year. Lawmakers from the Democratic Party assert that a deal can't be reached until these rates revert to pre-2003 levels while lawmakers from the Republican Party are equally adamant that any such increase would permanently scuttle a broader deal. 

Democrats have also indicated a preference to tax investments at higher rates. Given Democrats' increased political leverage after President Obama's robust reelection victory, it's likely that any budget deal will require Republicans to compromise on these issues. Unfortunately, this probably means that dividend investors will have to stomach higher tax rates in 2013 and beyond. Companies that pay dividends will also have to pay additional taxes on all future payouts.

Several high-profile American companies are responding to the impending hikes by issuing special dividends while lower rates remain in effect.

Seattle-based bulk retailer Costco (NASDAQ: COST) has announced that it will pay out a special dividend worth $7 per share on December 18. At the company's current share price of $103.92, this equates to an annualized yield just shy of 7 percent.

Casino operator Las Vegas Sands (NYSE: LVS) plans on issuing a special dividend of $2.75 per share on December 18 as well. At its current share price of $46.65, this represents an annualized yield of over 6 percent.

A few companies made sure to make these special payouts well in advance of the year's end. For instance, Progressive (NYSE: PGR) issued a special dividend of $1 per share in late November. At the time of its issuance, the payout produced an annualized yield of slightly less than 5 percent.

Some companies are also tweaking their existing dividend payout schedules in order to avoid the impending increase. For instance, Wal-Mart (NYSE: WMT) is moving the payout of its regular $.40-per-quarter dividend from January 2 to December 27 on a one-time basis. Collectively, the move will save the company and its shareholders hundreds of millions of dollars.

Among the companies that haven't yet announced special dividends for the remainder of 2012, Apple (NASDAQ: AAPL) stands out. For years, investors and finance experts have been clamoring for the cash-rich company to begin paying a regular dividend or at least offer occasional special dividends. As of the third quarter of 2012, Apple had about $31 in cash for every outstanding share. Even more importantly, it carries no long-term debt on its books. In addition, its share price has dropped more than 15 percent since marking an all-time high earlier in the year. By issuing a special dividend before the end of 2012, it may encourage some skeptical sellers to pile back into its stock.


mthiessen has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Costco Wholesale. Motley Fool newsletter services recommend Apple and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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