What is a Special Dividend?

Special dividends are one-time distributions of assets to company shareholders. Sometimes referred to as an extra dividend, the special dividend is different from the regularly scheduled dividends that investors receive as a matter of course. In most cases, the amount of this non-recurring dividend is greater than the usual dividends issued to investors, and only takes in situations where an unusually high amount of earnings have been posted by the business within a specified time frame.

There are situations other than unanticipated high earnings that may lead to the issuance of a special dividend. Should a company wish to implement drastic changes to the financial structure of the business, the extra dividend may be issued as a way of minimizing and inconvenience investors might experience during the restructuring. For example, if a business wanted to change their structure to focus more on debt-based financing, issuing an unanticipated dividend would be a good approach.

In like manner, a company may choose to issue a single non-recurring dividend as a means of establishing a new subsidiary. This subsidiary may be created by spinning off a portion of the existing business operation, or by acquiring a business that manufactures products that the parent company needs as part of the ongoing operation. The anticipation is that the establishment of the new subsidiary will be beneficial for the company in the long run, by reducing operational costs and possibly generating additional sales, both factors that have a positive effect on the dividends that are paid to investors in the future.

The issuance of a special dividend is typically seen as something extra for shareholders, and not an indication of a permanent increase in future dividends that will be received. Generally, the announcement of a special dividend will expressly indicate that the dividend issuance is a one-time event, and that the amount of the dividend does not in any way reflect the amount of any future dividend payments to investors. This approach helps to ensure that shareholders are not given a false perception of how the shares are anticipated to perform in the future, or what of dividends those shares will continue to yield.

News that a company is slated to issue a special dividend is often of importance to not only shareholders, but also to investors in general. One of the positive benefits that a business receives from issuing an extra dividend is that attention is called to the reason behind the disbursement of that one-time dividend payment. Depending on why the dividend was issued, other investors may investigate the plans of the business, see the potential of those plans, and choose to begin acquiring any outstanding shares currently traded on the market. This in turn can help increase the unit price for the shares of stock, an event that benefits the company and the current shareholders.