Act Quickly and Benefit From This Trend

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

The year is gradually coming to an end, but there is still no viable solution to the 'fiscal cliff' in sight. But while politicians are debating over the ultimate solution to this challenging issue, corporate America has already acted.

Are dividends part of history?

The current tax rate on dividends is 15%. This is a nice 'bonus' left from the Bush administration that is likely to disappear as Obama pledged to extract more tax revenues from top earners. If congress takes no action, the tax rate on dividends will revert to the ordinary income rate at 39.6%. This might cause a great deal of pain to corporate America that according to Bloomberg estimates is sitting on $3 trillion of cash.

Which companies are doing what?

Corporate America is certainly not sitting on its hands waiting for the new rules from the Obama administration. Different companies have chosen different methods of coping with this looming piece of news. The common denominator is, of course, how to save as much as possible on tax payments and how to deliver as much cash as possible back to the hands of shareholders. Let's review two of the methods frequently used by companies.

  1. Early payouts: Companies are trying to pay as much as possible in 2012 rather than wait for the uncertainty looming around 2013. Nothing terribly exciting in this concept, but it's still a clever thing to do. Wal-Mart Stores (NYSE: WMT), for example, changed the date of payment for its fourth quarter dividend to December 27 from the previously scheduled January 2, 2013.
  2. Special one-time dividends: Companies with abundant cash on their balance sheets, not meant to be used for any immediate purpose, don't intend to stick around and see what politicians will decide on 2013. They would rather act today and only then see what happens. Costco (NASDAQ: COST), for example, declared a special cash dividend of $7 per share, payable December 18. By doing this, Costco assured its shareholders that the company is exactly on their side. Shares climbed by 5% in reaction to the good news. Costco is not the only player in this field. Lately, Dillard's (NYSE: DDS) announced a special one-time cash dividend in the amount of $5 per share payable on December 21st to shareholders of record as of December 7. Another company that joined the wave of special dividends was Las Vegas Sands (NYSE: LVS) that announced on November 27 that it would distribute a special $2.75 per share on December 18 to investors of record on December 10. In addition, there are some fierce and persistent rumors of a possibility that Microsoft (NASDAQ: MSFT) will finally join the party as well. The last time Microsoft, currently sitting a huge pile of cash, distributed a special cash dividend was ten years ago.

How to take advantage of this trend

One way to take advantage of this trend is to simply make sure you hold shares of such special-dividend-paying companies on their respective record date. A different way, much more lucrative though risky, is to try and 'gamble' on the next company to announce such a special dividend. That way, you can benefit both from the immediate stock price reaction AND also collect the special dividend on payment date.


shmulikarpf has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale, Dillard's, and Microsoft. Motley Fool newsletter services recommend Costco Wholesale and Microsoft. 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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