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Ever collect a 22% special dividend?
If you’re looking for dividends, there’s one group of companies that will NEVER appear on any screen or list – and you’ll miss out on the biggest dividends in the market.
I'm referring to companies that actually pay a dividend that's two, three, four, and even seven times the stated dividend rate.
Most investors are unaware of these companies, because the yield and payment rate aren't posted on the popular financial websites. You could screen one of these companies and believe they offer a 1% or 2% dividend yield, when they actually offer a 5% or 6% yield – or more.
Special dividends were a hot topic last year. Many companies front-loaded their dividend payouts to avoid the possibility of the qualified-dividend rate of 15% reverting to the higher marginal income-tax rate.
Special-dividend payers wanted to get money to their investors so that the investors could avoid a higher tax.
Fortunately, the qualified-dividend tax rate rose only on the high end of the income curve. For wealthy investors, the qualified-dividend tax rate rose to 20%. Now that we know what the qualified-dividend tax rate is going forward, most of the companies that paid special dividends last year won't pay one this year.
Special dividends are a good idea in general, but might not be a good deal for income investors. These one-off distributions shouldn't be interpreted as a sustainable, high-yield dividend policy.
That said, there are a few companies that continually pay special dividends year after year.
Dish Network (NASDAQ: DISH), for one, has paid a special dividend each year since 2008. Last year, Dish paid a $1.00 per share special dividend. In 2011 and 2010, it paid a $2.00 per share special dividend.
But if you screen for Dish on Yahoo! Finance, it appears to be a non-dividend paying stock, even though Dish yielded 6% in 2011 and 3% in 2012.
A more striking example is found in Neutral Tandem (NASDAQ: IQNT). This Ethernet interconnection provider is shown to yield 4.7% based on its $0.25 annual dividend. Last year, Neutral Tandem issued a special $3.00-per-share dividend. This month it issued a $1.00 per-share special dividend.
That means Neutral Tandem actually yields 22% – more than four times the stated yield.
You might be curious to why companies that pay a recurring special dividend don't incorporate the special dividend into the regular dividend policy.
Many companies, for legitimate reasons, don't want to commit to paying regular dividends. If a company has meaningful investment opportunities with uncertain timing, flexibility, low debt ratios, and higher cash balances are desirable.
For a stable company, whose investment opportunities are limited or appear with regularity, a dividend is appropriate. But if cash flows are variable and excess cash is an anomaly, committing to an unsustainable regular dividend payout will do more harm than good.
Other companies, for whatever reason, just pay the special dividend – and have done so for years – but simply don't incorporate the dividend into their official policy, even though the special dividend is as dependable as the stated dividend.
The High Yield Wealth portfolio includes such an investment. This dividend-paying energy company has a stated dividend of $0.50 per share and 0.7% yield that most income investors would ignore.
Because of the special dividend, though, this company actually pays $3.50 per share in dividends – seven times the stated rate, which produces a more enticing (and remunerative) 5.2% yield.
There are currently two stocks with a long record of paying special dividends on the short-list to become new High Yield Wealth recommendations.
One is a consumer products company, with a 1.4% yield based on the stated dividend rate. When the recurring special dividend is factored in, the yield is actually 8.5%.
The other is a mining/natural resources company with a 4.5% yield, but when the recurring special dividend is included, the yield surges to above 8%.
In recent months, I've been warning High Yield Wealth subscribers that value in dividend-paying stocks is becoming increasingly difficult to come by. The good news is I'm finding nuggets of value in a couple special-dividend gems.
In this market, hidden income can be a good thing as some companies are forced to lower or eliminate dividends – others will still pay out their special dividends and most people will never know.