A special dividend is a one-time dividend paid to shareholders that does not conform to a stock’s normal dividend payment schedule. Special dividends are normally paid out in one of the following situations:
- the company has an exceptionally good earnings period
- the company is restructuring its assets
- the company just sold some substantial assets
- there is simply extra money on the balance sheet that the company wants to return to investors
Rules for Special Dividends
Special dividends that pay out under 25 percent of the stock value have a normal ex-dividend date and follow the rules outlined here. However, special dividends that pay out over 25 percent of the stock’s value have different rules that vary from stock to stock as these dividends are typically quite rare.
In general, when a company pays out a special dividend, the stock price of that company will drop according to the value of that special dividend. This drop in price is due to the dividend coming directly from the company’s balance sheet, which results in reducing the company’s worth.
Although the prospect of searching for stocks that pay high special dividends may seem alluring, it is generally a bad idea. The money you are receiving in the form of a special dividend is coming directly from the company’s cash reserves. This means the company won’t be able to re-invest that money into itself, which will hamper its growth.
It may be interesting to know that one of the most famous special dividends was given by Microsoft in 2003 when they paid out $3 per share totaling a $32 billion dividend!
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