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It happens out of the blue.
A company declares a large special dividend. It’s unanticipated. Investors don’t see it coming.
What investors don’t see coming are dividends frequently five-to-10 times the size of regular dividends. Dividends that generate yields of 10% to 20% are for the taking.
And even more is for the taking, if you know where to look. Dividends that generate a yield in excess of 40% can be found.
We’ve found a company that will pay a dividend to yield 41%. The stock can be bought until the end of November. The 41% dividend yield is still for the taking.
Such a high-yield dividend is extraordinary.
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If Apple (NASDAQ: AAPL) were to pay a special dividend to yield 41%, it would cost the company $365 billion. Apple’s good, but it’s not that good.
But companies exist that are good enough to pay such huge special dividends.
The company paying this special dividend to yield 41% is an unusual energy company. It was formed by its creditors two years ago. The creditors are insiders. They own a lot of the company’s stock.
This company has proven it can generate ample cash flow through its operations. Cash flow has trended in one direction — up — since it went public. Free cash flow generated over the trailing 12 months alone could pay for nearly half the special dividend.
Revenue and earnings maintain a similar trajectory: Revenue was up 43%, earnings per share were up 19%. I’m not talking year over year, I’m talking quarter over quarter.
Yes, the company will need to incur additional debt to fund the special dividend. Borrowing to pay dividends isn’t out of the ordinary, though. Apple, Microsoft (NASDAQ: MSFT), and Cisco System (NASDAQ: CSCO) have all incurred cheap debt to fund operations and pay dividends.
The capital structure is key.
You borrow to pay shareholders only if the capital structure can support the additional debt. Blowing up the capital structure and mortgaging the future for a sugar-junkie’s high is a nonstarter.
The good news is that this energy company that will pay this 41%-yield special dividend is hardly mortgaging its future. The capital structure will remain sound.
Even with additional outside funding, the debt-to-equity ratio remains below 25%.
Cash flow easily services the obligation. More important, cash flow remains to fund operations and grow the business.
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Why do it? Why pay a special dividend that yields 41%?
Capital management is one reason. Too much cash is like too much of any asset. It’s a drag on performance. It’s a drag on returns on invested capital.
In this company’s case, it’s removing excess cash with the special dividend. It’s also embellishing the payment with external funding. The dividend serves as a reward to shareholders inside and out.
The insiders will benefit with income taxed at a lower income-tax rate. Outsiders will benefit similarly. Both constituencies will benefit from the additional income.
The 41% dividend yield also serves as a signaling mechanism. It signals that management is optimistic about business prospects.
I’m optimistic about this company’s business prospects. It will benefit from less stringent regulation. It will benefit from growth in its international markets. It will benefit from its competitive advantage within its industry.
If you want to learn about huge special dividends issued by companies signalling optimism, join Ian Wyatt and me for free live webinar this Wednesday. You’ll learn how to collect high-yield dividends and profit from them like you never have before. RSVP today – It’s FREE!