Special Dividends Can Create Trading Opportunities

Some traders swear by the strategy of dividend capture. That is buying a security before the ex-dividend date and then selling soon afterward.

— Elliott Gue, Stocks on the Run

The following stocks all have something in common:

American Eagle Outfitters (NYSE: AEO)

Atrion (NasdaqGS: ATRI)

Brown-Forman (NYSE: BF-A) (NYSE: BF-B)

Drew Industries (NYSE: DW)

Express (NYSE: EXPR)

Gaming Partners International (NasdaqGM: GPIC)

Regal Entertainment Group (NYSE: RGC)


Special Dividends are Popping Up Everywhere!

All of these companies have announced – since yesterday (Dec. 1st) — that they will be paying a “special” dividend. Special dividends are one-time payments that the company makes without any commitment to repeat. In contrast, the Options Clearing Corporation defines “regular” dividends as those that are “paid pursuant to a policy or practice of paying such dividends on a quarterly or other regular basis.” The date next to each stock listed above constitutes the last date you can buy the stock and still get the special dividend.

I don’t recommend buying stocks just to receive special dividends, however.  Keep in mind that the stock usually falls by the amount of the dividend received on the ex-dividend date, so it’s a wash. What you gain in the dividend, you lose in a lower stock price. Actually, it’s less than a wash since you have to pay taxes on the dividend received.

Many more stocks than the eight listed above have announced special dividends (see a partial list below). So what’s going on? Why the mad rush to shovel extra money out to shareholders before the end of the year?

Reasons to Pay a Special Dividend

The main reason has to do with taxes. The reduced 15% tax rate for qualified dividends expires at the end of 2010.  For high income earners, that could mean that starting in 2011, dividends received will be taxed at the much higher 39.6% marginal tax rate for ordinary income. For the average taxpayer, a 25% of 28% ordinary income tax rate is more likely.

The website defendmydividend.org shows that there are only 29 days, 11 hours, 20 minutes, and 2 seconds before the end of the year and the expiration of the reduced dividend tax rate. As I wrote in a recent advisor roundtable, The Republicans are Coming!, the victory of anti-tax Republicans in the mid-term congressional elections make it more likely that the Bush-era tax cuts (including the reduced dividend tax rate) will be extended by the lame-duck Congress during December. 

However, until the extension has actually been passed, there is gnawing uncertainty. According to a December 1st Bloomberg article , one of the current legislative proposals in the House would extend the lower dividend tax rate of 15% only for individuals making less than $200,000 per year. Consequently, many companies appear to be paying out special cash dividends in 2010 to insure that the money will be taxed at the lower 15% rate.

Another reason to pay out cash to shareholders is because the company feels that there are no corporate investments available that provide a good return. Rather than let the cash burn a hole in the corporation’s pocket earning a pitifully-low savings rate, it is better to let shareholders find higher-return investment opportunities themselves. Some companies (e.g., optionsXpress, Armstrong World, and White River Capital) are going even further and actually borrowing money in order to pay a portion of special dividends. This can make sense right now given the extremely low cost of borrowing money, but it should only be done by companies that have healthy cash flow that can quickly pay back the debt.

Lastly, special dividends are sometimes paid out as part of a divestiture. This is the case with Maxygen, which has decided to divest itself of its remaining 17% stake in its publicly-traded subsidiary Codexis (NasdaqGM: CDXS).

Dividends, Special or Otherwise, Signal a Healthy Business

As I wrote in Dividend Cuts and Raises Signal Future Stock Performance and The Best Stocks are Dividend Stocks, cash dividend payouts are a signal that a company is healthy and that management feels confident that future cash flows are substantial enough that cash paid out now will not impair future growth opportunities. This positive signal is more pronounced for increases in regular cash dividends, for the obvious reason that regular increases require a greater commitment of cash than one-time special dividends. However, based on the table below, even companies that announce special dividends appear to get a bit of a stock price pop on the news:

Select Companies Announcing Special Dividends since October


Special Dividend Announced

Special Dividend as Percent of Stock Price

Peak Performance After Announcement

Last Day You Can Buy Stock and Receive Dividend

Ameron International (NYSE: AMN)

October 22


17.0% (Nov. 5)

Nov. 5

Progressive (NYSE: PGR)

October 22


7.7% (Nov. 5)

Dec. 15

Value Line (NasdaqGM: VALU)

October 22


38.7% (Oct. 27)

Oct. 27

Rennaissance Learning (NasdaqGS: RLRN)

October 27


20.2% (Nov. 4)

Nov. 9

Forrester Research (NasdaqGS: FORR)

October 28


7.2% (Nov. 24)

Dec. 3

Stamps.com (NasdaqGS: STMP)

October 28


14.0% (Oct. 29)

Nov. 8

Volcom (NasdaqGS: VLCM)

October 28


0.7% (Oct. 29)

Nov. 3

Wynn Resorts (NasdaqGS: WYNN)

November 2


4.4% (Nov. 9 )

Nov. 18

Telular (NasdaqGM: WRLS)

November 4


51.1% (Nov. 5)

Nov. 10

Werner Enterprises (NasdaqGS: WERN)

November 9


4.5% (Nov. 15)

Nov. 17

Knight Transportation (NYSE: KNX)

November 11


8.1% (Dec. 1)

Nov. 30

MEDTOX Scientific (NasdaqGS: MTOX)

November 12


11.0% (Nov. 15)

Nov. 17

Limited Brands (NYSE: LTD)

November 17


9.1% (Dec. 1)

Dec. 2


November 18


6.5% (Nov. 29)

Dec. 9

The Buckle (NYSE: BKE)

November 18


10.6% (Nov. 23)

Nov. 30

Maxygen (NasdaqGS: MAXY)

November 22


10.4% (Nov. 23)

Dec. 14

Armstrong World Industries (NYSE: AWI)

November 23


7.0% (Dec. 1)

Nov. 30 and cannot sell until Dec. 13

AboveNet (NYSE: ABVT)

November 23


4.2% (Nov. 24)

Dec. 1

Interactive Brokers (NasdaqGS: IBKR)

November 29


6.4% (Nov. 30)

Dec. 6

optionsXpress (NasdaqGS: OXPS)

November 29


10.3% (Nov. 29)

Dec. 8 and cannot sell until Dec. 28

White River Capital (NYSE: RVR)

November 30


20.6% (Dec. 1)

Dec. 6

As seen above, many of the stocks announcing special dividends rise substantially after the announcement. Furthermore, the rise usually continues for several days after the announcement and is not immediate. Examples of very profitable trades include Ameron, Renaissance, Value Line, The Buckle, and Limited Brands.

Of course, not all trades would have been winners. The stocks of optionsXpress and Volcom, for example, jumped right after the special dividend announcement and have trended down since.

Buy Stocks That Have Catalysts With the Help of Stocks on the Run!

Special dividend announcements are a type of catalyst that can signal future stock price appreciation. Elliott Gue, co-editor of Stocks on the Run, loves to look for catalysts; in fact, they are one of Elliott’s favorite buy triggers.  As he wrote in a recent advisor roundtable:

When researching growth-oriented companies I look for catalysts. There’s no point in buying or selling a stock that’s just going to trade sideways or follow the broader market in lockstep

If you are looking for a short-term trading service that can spice up your investment returns with some quick winners in three to nine months’ time, Stocks on the Run is just what the doctor ordered.

Right now, Gue and co-editor Yiannis Mostrous are recommending five stocks primed to deliver double-digit gains quickly. To find out the names, give Stocks on the Run a try today!