Friday, November 30, 2012

Special Dividends

This December we will be seeing a glut of special dividends from corporations across all sectors.  We are told that these special dividends are in order to reward investors prior to the forthcoming possible tax hike in January 2013.

But are these special dividens really as rewarding as they seem?
I say NO!

These special dividends are nice chunks of money of course. But that money is coming out of the various companies in many forms. Some are using cash reserves, some are even borrowing money.

Using cash reserves is only ok if the company can really do without that cash in the short term. Personally I would rather take a slow steady smaller dividend and accept the risk of a tax hike myself, after all I have most invested in tax efficient vehicles such as a ROTH IRA for my non efficient brokerage account I have strong allocations of stocks in Muni Bond funds generating cash so limiting tax there.

Companies borrowing money to pay special dividends is stupid in the extreme. Why borrow money to give it away. If you can't pay a dividend then don't put yourself in debt for the future.

Some of the biggest earners from special dividends are members of the boards of some of the companies. They are in fact lining their own pockets  and claiming to have the best interests of shareholders in mind.

In order to reecover from these special dividends we will probably see dividends as a whole reduced for a year or two at least. This is because companies will need to either service the debt of loans or have little cash in the next year to maintain investment in growth of their business.

These special dividends are not the free money that they are hailed as. They come at a cost and I just hope that we the shareholders do not pay the ultimate cost, loss of our money.