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The first time of anything usually produces the most indelible memory: the first day of school, the first job, the first date. You might also remember your first investment. First times produce the most indelible memories because first times are usually imbued with the most anxiety.
We launched a new dividend-investment service, Dividend Confidential, in May. Dividend Confidential was not only new, it was unique. Investment opportunities in special dividends, which are both high-yield and unanticipated in either amount or timing, are the focus. But our research shows that the right special dividends – ones that adhere to our proprietary investment criteria – can produce exceptional investment returns.
With research and criteria in hand, I was eager to launch Dividend Confidential, though I was anxious not to launch with the wrong special-dividend investment. Fortunately, we launched right. We closed our inaugural special-dividend investment – MCBC Holdings (NASDAQ: MCFT) – last week, and we closed it at a profit.
So, why was MCBC Holdings picked as our inaugural special-dividend investment?
The timing was certainly ideal. MCBC Holdings declared a $4.30-per-share special dividend in May near the time of our launch. The yield on MCBC Holdings’ special dividend generated was an immediate attraction. The dividend produced a 33% yield on the closing share price. Such high-yield dividends are few and far in between.
Timing and yield alone, though, fail to elevate a special dividend to investment status. The special dividend must enhance, not diminish, the investment proposition. I though MCBC Holdings’ special dividend enhanced the investment proposition.
I liked MCBC Holdings’ business. It’s a leading designer, manufacturer, and marketer of performance sport boats – most notably the highly regarded MasterCraft line.
The business was on a growth trajectory: Revenue had increased 37% since 2013; operating earnings had increased 75%. More important, management expected the business to remain on a growth trajectory, guiding for 10% revenue growth and 15% EPS growth for the coming year.
Growth is a factor in vetting a special dividend, but so is affordability. The special dividend matters only if the business justifies it. Anyone can mortgage the future for a meaningless junky-energy jolt today. You want to do it right. When you do it right, you pay the dividend only if you think it can enhance shareholder value.
MCBC’s special dividend demanded a lot of cash, roughly $80 million of it. This was a significant sum for a company with a $290-million market cap. But upon deeper analysis, I realized MCBC Holdings could afford its high-yield special dividend without diminishing its growth prospects.
For one, free-cash flow continually trended higher. Over the trailing 12 months, MCBC had generated $22.6 million in free-cash flow – cash left over after the bills are paid. Three years earlier, MCBC generated $13 million in free-cash flow. Over the same period, gross, operating, and net margins had continually expanded.
Prime Opportunity in MCBC Holdings
I concluded that MCBC Holdings’ special dividend (along with continual share buybacks) was a smart strategy for removing excess cash. By aggressively returning excess cash to shareholders, management demonstrated a commitment to high returns on invested capital – a key component to perpetuating shareholder value.
Convinced that MCBC Holdings offered a special-dividend investment opportunity, I sent an initial buy alert to Dividend Confidential subscribers on May 27. This alert recommended dividend investors buy to collect MCBC Holdings’ $4.30-per-share special dividend.
But special dividends offer more than income opportunity. After the share price is adjusted lower by the special dividend, an opportunity to profit from share-price appreciation arises. On June 13, the ex-dividend date, I sent another buy alert recommending investors exploit MCBC Holdings’ share-price appreciation potential.
When we closed both trades last week, dividend-income investors realized an 18.7% return on their investment; capital-gains investors realized a 20% return.
Find the ‘Right’ Special Dividends
Since May, we’ve opened and closed many special-dividend investments at a profit. But MCBC Holdings will always stand out because it was the first.
The right special dividend offers immediate high-yield income while concurrently setting the stage for future high-return growth. But “right” special dividends are the exception, not the rule. Most special dividends provide immediate high-yield income, but at the expense of future growth and shareholder value.
On Thursday, Dec. 1, Ian Wyatt and I will host a free special-dividend teleforum at 2 p.m. EST. During the teleforum, you’ll discover the high-yield, high-profit opportunities the right special dividends offer. This is a can’t-miss event for dividend investors. You have nothing to lose except the opportunity to invest for income and profit in dividend-paying stocks as you never have before. Click here to reserve your space.