A host of companies have announced special dividend distributions in the last month or so, and I expect more to do so before the end of the year.
A dividend is a payment from a company to anyone who owns a share in that company and usually occurs regularly throughout the year. A special dividend is a one-time payment at the company’s discretion and can be in any amount the company sees fit to pay.
These special dividends are happening now before the end of 2012 as tax rates on dividends are expected to increase due to new tax IRS regulations, and companies want to give their shareholders as much money as they can afford before the new rates kick in.
Company execs who make these decisions are usually also stock holders, so they have every incentive to announce these payments to catch the lower rates they to will pay on their dividends.
This reaction by companies is expected as they seek to maximize shareholder profits, and paying dividends at lower tax rates qualifies as doing just that.
Reactions by companies to government and tax policies is the market’s way of dealing with new situations and environments, and it’s a good example of what happens when governments throw new wrenches into the works of a capitalistic system.
In the infamous quote from Dick Cheney, there are known knowns, known unknowns and unknown unknowns, and each action by authorities has expected and unexpected reactions in the markets they affect.
Now a boatload of monies is being doled out by every company that can afford it, and these early payments could spell reduced payments in the future. Indeed many analysts think dividend-paying stocks, of which there are many, could be sold off in 2013 because of the new tax rates on payments, and where that money goes is anybody’s guess.
With more and more places to hide and earn a decent return being gutted by increasing and onerous tax policies, investors will migrate to the next best thing.
I still think dividend stocks are a place to go with a portion of your money. Stocks that pay are obviously better than stocks that don’t. Only time will tell if the new tax rates will stick in the negotiations going on right now in Washington, but for now, companies are being proactive and not taking any chances.
Check the news wires on the stocks you own, you could be getting an unexpected Christmas present in the form of a big fat unexpected dividend check.
This article expresses the opinions of Marc Cuniberti. He hosts “Money Matters” on KVMR FM 89.5 and 105.1 FM at noon on Thursdays. He has been featured on NBC and ABC television and on a host of made for TV documentaries for his economic insights. His website is www.moneymanagementradio.com.