Investment Contrarians

How Dividend Paying Companies Are Helping Ahead of the Fiscal Cliff

By for Investment Contrarians |

Dividend Paying Companies Are Helping Ahead  of the Fiscal CliffThe fiscal cliff is currently dictating the trading action in the equities market as we near December and the year-end. With 28 days left until the Bush-era tax cuts are allowed to dissipate, there is widespread fear and concern of a significant jump in taxes, including those on dividends, especially for those who invest heavily in dividend paying stocks.

The prevailing dividends tax of 15% is extremely accommodative to income-seekers, but under the fiscal cliff, we could see the tax on dividends surge to 39.6% for earners in the highest tax bracket. For dividend investors, this means a massive jump in taxes in 2013.

With the uncertainty of whether the fiscal cliff will be resolved prior to January 1, we are seeing numerous U.S. companies paying out special dividend payments to their shareholders now to avoid a potential massive tax hit for investors in the future years under the fiscal cliff.

These companies, whether or not they have historically been big dividend payers, are doing what they can to help shareholders by paying big dividend payments now under the lower taxes.

Just take a look at the numbers. In the period from the end of September to mid-November, Bloomberg says that 59 companies belonging to the Russell 3000 index announced special cash dividend payments, versus 15 companies in the same timeframe in 2011. (Source: “Special Dividends Surge Fourfold as U.S. Tax Increase Looms,” Bloomberg Businessweek, November 19, 2012.) The move to initiate special dividend payments is not a surprise, and I expect the dividend payments to continue over the next few weeks, unless a deal is struck.

Assuming the fiscal cliff is coming, as an investor, you want to try to receive some dividend payments this year at the lower tax rates.

Costco Wholesale Corporation (NASDAQ/COST), which usually pays annual dividend payments of $1.10 per share, announced that it was paying a special dividend of a whopping $7.00 a share, or seven percent of its prevailing share price. That’s around $3.0 billion in payouts, but the company is looking to what benefits its shareholders. You still have a chance to partake, as the special dividend is payable on December 18 to shareholders of record on December 10. Companies like Costco that have strong cash reserves, $4.9 billion in this case, will be looking to pay out some cash to shareholders at this time before tax rates ratchet higher.

The special dividend payments are not limited to the large-cap stocks. Small-cap Movado Group, Inc. (NYSE/MOV), armed with about $156 million in free cash, declared a special dividend of $0.75 a share to be paid in December.

Other companies announcing special dividend payments that you can still get in on include Wynn Resorts, Limited (NASDAQ/WYNN), offering an $8.00 special dividend; Las Vegas Sands Corp. (NYSE/LVS), offering a $2.75 special dividend; and Dillard’s, Inc. (NYSE/DDS), which is offering a $5.00 special dividend.

And then there’s Apple Inc. (NASDAQ/AAPL). The company pays out $1.10 per share in annual dividends, but with nearly $30.0 billion, or $30.97 per share, in cash, I wouldn’t be surprised if Apple soon decides to pay out its own special dividend payments; but then Apple may decide it needs to look toward the future and hold on to the cash.

One of the richest companies out there is Google Inc. (NASDAQ/GOOG), with net cash of over $37.0 billion. The company is not a regular dividend payer, but I wonder if there may be a special dividend in the works?

One thing is for sure; as the deadline approaches, I expect to see more companies declare special dividend payments over the next week.

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