When most investors hear about dividends they immediately assume a regular dividend paid by companies quarterly, but the fact is that there are other types of dividends you can use. So, what is a special dividend? And what is the difference between a special dividend and a regular dividend?
What is a special dividend?
A special dividend is a distribution of cash, resulting from the company’s retained earnings that are paid to shareholders on special events or occasions. Typically, special dividends are uncommon profit distributions following an asset sale or spin-off of one of the company’s subsidiaries.
Special dividends can also be associated with better than expected financial results by the company.
stock or other assets made by a company to its shareholders. The purpose of the distribution is usually to raise money for the company, but it can also be used to reward shareholders for their long-term investment in the company. A special dividend is typically considered to be an extraordinary event by financial analysts, and it can have a significant impact on the stock price.
Why do companies pay special dividends instead of raising the regular dividend?
Since raising quarterly dividends paid by the company could put pressure on the company to maintain their dividend at high levels, companies often choose to reward shareholders with a special dividend.
Since most of the time the special dividend is paid following an unexpected event like an asset sale or a better than expected financial year, it is better to pay a special dividend than to raise their regular dividend, which might have to be cut later on.
How do special dividends affect the stock price?
Special dividends tend to have a very positive impact on the stock price. When a special dividend is announced stocks tend to rally and usually make new highs. The increased price can, however, be short-lived, until the dividend ex-date.
Special dividends also tend to be a very positive indicator of the company’s quality, and they are paid on top of the regular dividends.
Special dividend vs quarterly dividend
There are a few main differences between special dividends and regular dividends:
- Frequency: Special dividends are paid sporadically, while regular dividends are paid quarterly
- Occasion: While regular dividends are paid on a quarterly basis, special dividends can be paid in one year, due to the company having great earnings.
- Yield: Regular dividends tend to be a fixed percentage of the company’s earnings, special dividends can sometimes represent a large percentage of the stock’s price.
While special dividends can be a rare occasion if you are looking to reap the rewards of investing in dividend companies for the long term you should be on the lookout for companies paying special dividends. As it can really boost your passive income generated by your investment portfolio.