Financial Term Explorer
Special Dividend
A **special dividend** is a one-time bonus payment. Often paid when a company has extra cash. Learn more!
📝 Definition
**Special Dividend** is a one-time dividend payment made by a company to its shareholders, separate from its regular dividend schedule. Companies issue a **special dividend** when they have accumulated a significant amount of excess cash, often from asset sales, unexpectedly high profits, or other windfalls, and decide to distribute it to shareholders instead of reinvesting it in the business.
In Simple Terms
Think of regular dividends as your consistent paycheck. A **special dividend** is like winning the lottery – an unexpected bonus! Companies might pay a **special dividend** after a major event like selling a division, winning a large lawsuit, or experiencing a particularly profitable year. It's extra cash on top of the usual dividends.
Example
Costco periodically pays special dividends. In 2020, shareholders received $10/share on top of the normal $2.80 annual dividend. That's almost four years of regular dividends in one bonus payment!
💡 Practical Tips
- 1Don't rely on special dividends for consistent income; they are infrequent and unpredictable.
- 2A special dividend can indicate that the company believes it has no better immediate use for its excess cash, which might raise questions about future growth opportunities.
- 3Pay close attention to the ex-dividend date for special dividends. You must own the stock before this date to receive the payment.
- 4Consider the tax implications of a special dividend, as it will be taxed in the same way as regular dividends.
- 5Remember that a special dividend can temporarily boost your dividend yield, but it's not a sustainable increase.
⚠️ Common Mistakes
Assuming special dividends will be recurring. They're called 'special' for a reason – they are not a regular part of the company's dividend policy.
❓ Frequently Asked Questions
Are special dividends taxed, and how does it work?▼
Yes, special dividends are taxed just like regular dividends. The tax rate depends on factors like your holding period (qualified vs. ordinary rates) and the type of company issuing the dividend. Consult a tax professional for personalized advice.
Why do special dividends affect the stock price on the ex-dividend date?▼
The stock price typically drops by approximately the special dividend amount on the ex-dividend date because the company's cash reserves are reduced by the dividend payment. This reflects the reduced value of the company after distributing the cash to shareholders.
Should I buy a stock just to receive a special dividend?▼
Buying a stock solely to receive a special dividend is generally not recommended. The stock price often drops by the dividend amount on the ex-dividend date, negating the immediate gain. Also, consider the tax implications and whether the company's long-term prospects align with your investment goals.