Special Dividend

  

Categories: Stocks

Old sitcoms used to have "very special episodes." Mallory got offered drugs at a party. Jessie got hooked on diet pills. Carol's boyfriend died in a car accident. But don't worry...everything was fixed by the following week. Well, maybe not Carol's' boyfriend.

Special dividends work a little like that. Exciting, one-off events that don't really impact the general course of events.

A regular dividend involves cash being paid to shareholders, usually on a quarterly basis. It's a way of distributing company profits to shareholders. So...a company might declare a regular dividend of $1.50 a share. If you own 1,000 shares of the stock, you'll get a check for $1,500.

The key is that this dividend takes place every quarter. The company has to declare it, and can change the amount or suspend it if the management chooses. But, generally speaking, these normal dividends get distributed on a regular basis.

Special dividends are, well...special. They don't repeat quarter after quarter. They often get declared when the company gets a surprise windfall of cash, or if the company has hoarded a large amount of cash and shareholders demand it get spread around.

A company declares a special dividend of $5 a share. Your 1,000 shares now entitle you to a check for $5,000. But that's the only check you'll get from this dividend. It's special...one-time. You might still get your regular dividend next quarter. But the special dividend only comes around once in a while.

Related or Semi-related Video

Finance: What is an Accumulated Dividend...9 Views

00:00

finance a la shmoop what is an accumulated dividend okay you know what

00:08

a dividend is companies generally commit to paying it when they have so much [Example of dividend meaning on a 100 dollar bill]

00:13

extra cash profit that they really don't know what to do with the dough yeah nice

00:17

place to be in the case of a preferred stock the dividends aren't just a

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optional-ish they operate more like bond interest only with a catch

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that is dividends on preferred stock can in fact be halted without the company

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being repossessed by the debt holders like in the case where the company falls [Prize wheel lands on hard times]

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on hard times or it wants to preserve its cash to buy a competitor or it just

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wants another jet with a water slide thing on it well yeah it can halt its [Person slides down a jet slide]

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dividend in those cases and well there are two types of preferred stock in this

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realm the ones that pay cumulative dividends and the ones that don't

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cleverly named non-cumulative say a company has halted dividends from its

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preferred for three and a half years and it was paying five bucks a quarter in [Dividend distribution graph]

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dividends from those cumulative preferred well if it was to resume

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paying dividends on them it would first have to pay all back fourteen quarters

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worth of dividends before it began to issue more dividends or pay them to its

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preferred holders that is it owed three years times four quarters or twelve

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quarters plus half a year or two quarters for a total of fourteen

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quarters at five bucks a quarter a share that's five times fourteen or seventy [Formula of non-cumulative dividends]

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dollars a share in back cumulative dividends big obligation but it has to

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pay that amount before it can resume dividend payments why would a company

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have a cumulative feature in its preferred dividend obligation well

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because investors forced it to do so or they wouldn't invest they were worried [Person swipes away stacks of money]

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that the preferred dividends might be just some merrily stopped and then the

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investors would have little or no return on their investment in the preferred and

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this can be a problem for companies that have fallen on hard times they are

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essentially made illiquid in that they can't afford to pay the back dividends [Example of illiquid meaning]

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on the preferreds and they can't raise more capital with this blight on their

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record of having stopped paying a divvy well most [Non cumulative stock stickers appear on a table]

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furred stocks are non-cumulative and if companies decide to just stop paying

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them they can but if they do it's kind of like they've reneged on a handshake [Two guys giving a handshake]

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and you know investors talk so like good luck to the company ever trying to raise

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capital again from the cold cruel outside world yeah welcome to Wall

02:33

Street [Wall Street road sign]

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