An interesting development over the last month or so has been the announcement from several companies that they are making early dividend payments and moving up payment of their 1Q2013 dividend into 4Q2012, in order to allow shareholders to collect the dividend at today’s tax rates. This is a direct result of the uncertainty surrounding tax rates for 2013 and what will happen with the fiscal cliff situation. In addition to early dividend payments, many companies are announcing special dividends, which are more of a one-off dividend payment made for a variety of reasons.
I don’t have a whole lot to say about this other than simply pointing it out as interesting. I believe the same thing happened a couple of years ago (2010, maybe?) when there was also uncertainty about future tax rates. This could potentially be a buying opportunity if you were planning to buy into one of these companies already and you are able to get in before the ex-date. Most companies are announcing these payments now, or have announced them recently. A quick scan of news items for your target company should tell you whether or not they are paying an early dividend.
One question this raises in my mind is: How will the early dividend payment affect the regularly scheduled 1Q2013 dividend and how will it affect the 4Q2012 results? Whether a company uses debt or cash to pay an early dividend, the balance sheet is going to be impacted either way. I’ll be interested to do a little research in early 2013 to see what sort of impact the early dividends had on these companies, if any at all.
One final note: dig a little bit into the companies doing the special dividends. There is some research out there showing that often when a companies pays a special dividend, the majority of that payment goes to company insiders. This can be used as a type of bonus payment that gets around income taxes, or it can also be used as a way for some insiders to sort of “cash out” before bad news is announced for the company (poor results, looming bankruptcy, takeover, etc.). So as always, do your research before making any investment.
What about you – are you invested in any companies paying early or special dividends?
Brick By Brick Investing | Marvin on December 9, 2012 at 1:41 pm said:
I have heard the same as well. I don’t see a negative to this as long as the company has the money to issue the dividend.
Martin on December 17, 2012 at 9:49 pm said:
I am only worried about the impact on the stock value overall. If the tax hike becomes the reality for the rich people, how will they respond to it? Will they sell and push the price down to make up for lost rate? If so, I wouldn’t like much holding losing positions although it doesn’t bother me that much if the income stays steady.