What Is A Special Dividend?

In case you missed it, in Tuesday’s Juice, we laid out a solid ETF-centric approach to buying dividend stocks, a group we think will perform well in 2024. 

As we looked back on yesterday’s installment, we saw something interesting in Trackstar, our proprietary database of the tickers investors search for most across our 100-plus financial media partners. 

In the matter of just two weeks, Disney (DIS) and Walmart (WMT) dropped out of the top five dividend stocks retail investors search for most. This is somewhat odd, because, along with Apple (AAPL), Microsoft (MSFT) and Visa (V), they’re almost always in the top five. And, if for some reason one of them falls out, it’s typically AT&T (T) that enters the fray. 

But not this time: Costco (COST) and Pfizer (PFE) enter the picture alongside AAPL, MSFT and V as the dividend stocks everyday investors are searching for most in Trackstar. 

Pfizer likely moved up because, on December 13th, it issued 2024 guidance Wall Street absolutely hated. Down roughly 45% YTD, PFE dropped nearly 9% on the news, but has actually gained pretty much all of that downside back over the last week or so. 

Costco shot up the ranks in Trackstar because, for the fifth time in just over ten years, the company issued a special dividend. 

Costco has a track record of paying special, one-time dividends. The company did it in 2012, 2015, 2017, 2020 and now in 2023. This extra dividend comes in addition to the company’s regular quarterly payout, currently set at $1.02. And it’s much larger at $15.00 per share. 

This special $15 dividend is also larger than the company’s previous special payouts, which ranged from $5 to $10 per share. 

A special dividend generally comes about when a company has excess cash it feels comfortable distributing to shareholders. 

You’re too late to get Costco’s special dividend — you had to be a shareholder of record by the end of today’s close (which you won’t be able to pull off due to how stock transactions settle) — but that’s okay. It’s generally not a good idea to chase special dividends. We’re using Costco’s timely news to define what a special dividend is and as an explainer on the subject. 

As Dividend.com notes, 

Investors might be tempted to trade around, or “capture,” special dividends to take advantage of the high yields. However, the stock exchanges set complicated dividend dates in order to prevent traders from trying to take advantage of the dividend system. And as with all dividend payouts, the stock price will be negatively adjusted on the ex-dividend date to reflect the upcoming payout. Special dividends are strictly to reward long-term shareholders.

Exactly. So, if the stock drops by the special dividend amount, it makes very little sense to buy simply because of the special dividend. 

If you own 100 shares of a $100 stock that pays a $10 special dividend and that stocks declines by the dividend amount (to $90) on the ex-dividend date, you’ve lost $10 per share (or $1,000) on the stock on paper at the same time as you collect the $10 dividend per share (also $1,000). So, it’s basically a wash. 

When Costco made its announcement on December 14th, the stock soared. From roughly $631 to about $681. But this happened on earnings when the company made the special dividend announcement. You could have anticipated this news — some investors felt Costco was due for another special dividend — but you probably could not have predicted it. 

Here again, you’re not in Costco stock because it pays special dividends more than other companies or to try to capitalize on one. You’re in Costco stock because you believe in it long term. Any dividend payment on top of the normal payout is merely icing on the cake. 

Dividend or not, Costco is up roughly 48% YTD. It’s generally just a good name to own for long-term investors. Therefore, if you see the stock fall on the dividend or any other news, you might have found an attractive entry point. 

The Bottom Line: We prefer the ETF approach to dividend investing we outlined yesterday (see the link at the top of this email). After you have broad exposure to dividend payers via an ETF, maybe take a look at your favorite individual stocks and start buying them. 

We like the same approach more broadly. Buy SPY and QQQ first, then get into your favorite names from those two broad-market ETFs individually. 

This is merely one way to approach investing. But, The Juice thinks it’s one of the smartest ways for most investors, particularly those with relatively limited capital and a long-term time horizon with an end goal such as retirement. An important subject we’re going to cover the ins and outs of throughout 2024, but starting tomorrow in what will be our last Juice of 2023. 

However you do it, don’t chase special dividends. It’s almost as bad as trying to time the stock market.

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• More On Why You Shouldn’t Chase Special Dividends