Published Tue, 13 Aug 2019 11:26:46 on Income Investors
These Special Dividend Payments Yield Up to 41%
August will go down as a forgettable month for investors. After a simmering trade spat between China and the U.S. boiled over into a full-blown trade war, panic traders sent the Dow over 2,000 points.
But it was a great month for one small group of investors. Shares of military parts supplier TransDigm Group Incorporated (NYSE: TDG) rocketed more than $63.00 apiece following the company’s earnings releases. Amid frenzied trading, TDG stock hit an all-time high of $555.57.
What triggered the pop? Thanks to booming profits, management announced a one-time special dividend payment of $30.00 per share. Based on the company’s 30-day average stock price, this payout equates to a distribution yield of seven percent. (Source: “Transdigm Group Reports Fiscal 2019 Third Quarter Results,” TransDigm Group Incorporated, August 6, 2019.)
The Stock Market’s Hidden High-Yielders
I love these types of situations. Special dividends allow investors to collect more income overnight than some people collect in a few years. These announcements also tend to be preceded by big stock price pops, lining shareholder returns further.
So you might be thinking: “How do I begin cashing in on these types of opportunities myself?
In my paid newsletter Passive Monthly Income, I regularly highlight these opportunities. And over time, I’ve developed a few techniques to spot special dividend announcements ahead of time.
The trick comes down to studying high-quality businesses. You don’t want to get involved in any old company giving away cash. In fact, many investors lose their shirt investing in mediocre businesses issuing special dividends.
So to separate the studs from the duds, I look for these characteristics:
The business generates far more cash than it can possibly reinvest A large amount of cash has piled up on the company’s balance sheet The company has a long track record of sharing that wealth with shareholders. Sadly, these stocks often go unnoticed. Because they don’t pay regular dividends, most income investors haven’t heard about them. Or because they often have low reported yields on Yahoo! Finance, they dismiss these names out of hand.
But by digging into the financials, it’s possible to spot a special dividend announcement ahead of time. These stocks often don’t pay regular income, mind you. Yet the occasional oversized payment can provide a nice income supplement.
Take Warrior Met Coal Inc (NYSE: HCC), for instance. In early-2017, the company wanted to return a large amount of cash that had piled up on its balance sheet. To clear up this problem, HCC stock paid out a special dividend of $600.0 million, which came out to a yield of 41%. (Source: “Warrior Met Coal Clarifies Ex-Dividend Date for Special Dividend,” Warrior Met Coal Inc, November 6, 2017.)
Management has followed up with similar maneuvers. In early-2018, Warrior Met Coal paid another $6.53 per share distributions. And in early 2019, the company rolled out another one-time payment of $4.42 per share. When you include the company’s regular quarterly dividends, this coal miner has emerged as an income machine.
We’ve seen the same thing at retail giant Costco Wholesale Corporation (Nasdaq: COST). In early 2017, executives declared a $7.00-per-share special dividend. If you include the regular distributions Costco paid that year, shareholders earned a total annual yield of seven percent.
Could another special dividend be in the works? Thanks to President Donald Trump’s tax cuts, higher profit margins, and robust sales growth, Costco generates more cash than management can possibly redeploy back into its business. At the end of the last quarter, $133.0 million in cash and short-term investments accumulated on the company’s balance sheet. Don’t be surprised to see the company issue another payment soon.
More Special Dividend Announcements Coming
Best of all, we’re approaching the busy season for special dividend announcements. Companies that participate in these programs usually start writing checks toward the end of the year.
Out of fairness, I can’t reveal all of these stocks. But for those willing to do their homework, these deals make for lucrative income opportunities. So keep your eyes peeled.
... Read more
|Stock name||Last trade||P/E||Earnings/Share||Dividend/Share||Dividend yield|
Older articles featuring Costco Wholesale (COST):Dividend Champion And Contender Highlights: Week Of November 10
Dividend Champion And Contender Highlights: Week Of October 27
Target: The Only Retail Dividend King Is Rebounding But Competition Is Intense
Income Investors: Where to Find the Best Dividend Stocks Right Now
Jobs Day, Tesla Deliveries And Dazzling Dividends (Stocks To Watch Podcast)
Dollar General's Growth And Rising Dividend Make It My Top Choice In Retail
Dividend Champion And Contender Highlights: Week Of May 19
25 Upcoming Dividend Increases Including Apple, Exxon And One Dividend King
A 9% Special Dividend Likely Coming From Costco Wholesale Corporation?
March To Freedom Fund 1st Quarter Update: 12%+ Portfolio Growth And 31% Increase In Dividends