What is a Special Dividend?

A special dividend is a type of payment that is made by a company to its shareholders. This type of dividend is different from a traditional dividend that is received by stockholders in the company. Here are a few things to consider about the special dividend and how it works.

Special Dividend

As the name of this type of dividend implies, this is a payment that does not occur often. With this type of dividend, the company decides to make a special payment to the shareholders of a company. In most cases, the dividend will be greater than what they would have received with a regular dividend payment. Many companies make dividend payments every quarter or every year. Some companies even make monthly dividend payments. However, with the special dividend, it could come at any time and there is no rhyme or reason to its distribution.

Why They are Offered

Companies could have many different reasons when it comes to issuing a special dividend. One reason that a company might issue a special dividend is because they just had a very good quarter financially. If the company did better than normal for a given financial period, they might feel the need to share some of the wealth with the shareholders. They might go ahead and issue a regular dividend and then feel like they still need to give some additional profit back to the shareholders. In that case, they will take the profits that were generated for that particular quarter and then split them up among the shareholders. This is a good strategy when a company wants to keep the shareholders happy and give them an incentive to stick around. 

In some cases, companies may want to get away from a particular type of financing structure. They might pay a large dividend to the shareholders before going to a more debt-heavy financing mix. 

Other Considerations

As a shareholder, you have to be aware of the possibility of receiving special dividends. However, you should not expect to receive them very frequently. There is not a particular time that you should expect them or a particular amount that you should expect to receive. Trying to predict when a special dividend will be issued will generally be futile. Even if you see that a company has posted gains that are larger than normal, that does not necessarily mean that they will put more money into dividends for the shareholders.

In many cases, a company that posts bigger gains will use that money to grow the company. They might reinvest in new technology or use the money to open a new location or manufacturing plant. The possibilities for excess profits are basically endless and special dividend payments are but one of the options that companies have to choose from. When you receive a special dividend, you should be thankful, but do not expect it to become a regular occurrence.

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