Diary of a Dividend Diva: Playing the Specials

 | Dec 03, 2012 | 10:00 AM EST  | Comments
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With dividends coming fast and furious, it looks like a great holiday for income-oriented investors.  Here are a few thoughts regarding the current dividend-fest.

Remember that when you play special dividends, focus on the total return on the trade, not just the cash payment. The larger the special, the steeper the drop in the stock when it goes ex-dividend. Expect to book a capital loss along with receiving the dividend, so the difference is what really matters.  A couple of specials I played recently illustrate how you should shape your thinking.

FutureFuel (FF): I bought this on Nov. 19 at $11.90, after the special dividend of $1.20 had been declared and a couple weeks before the ex-dividend date.  The stock dropped to $11.10 from $11.60 on the ex-date, one of those uncommon but wonderful situations where the stock didn't drop the full amount of the dividend.  The stock is now at $11.35, where I am selling it today.  Combining my capital loss with the dividend return of 10% means I will earn a bit over 5% on the trade, with a holding period of around three weeks.

Boise (BZ): I bought BZ also on Nov. 19 at $8.33, well after the declaration of a $0.72 special.  The stock dropped to $8 from $8.80 on the ex-date, but has since recovered $0.20, or 3%.  The capital loss on selling today combined with the income will yield a total return of nearly 7%.

Last week, Real Money contributor Chris Laudani made some important points regarding special dividends: they are mainly a payout to insiders, and they shouldn't matter in theory since the company has the same prospects after the dividend as before.  For your personal finances, the dividend shouldn't matter either.  Before it, you are holding a stock worth X dollars, and afterward you have cash and stock together that should be worth X dollars.  Yet the reality is often what I illustrated above. While the economics are mostly unchanged, the value of the stock seems to be more preserved than expected after the dividend, probably because it signals management's strong confidence in future growth.  If they were concerned about economic conditions, they would hoard cash, not return it.

One unnoticed consequence of this surge in dividends driven by the change in tax rate is that cash is finally freed up for better investment, which helps the economy.  Many have noted that cash is piling up on corporate balance sheets and is not being used to drive growth.  By returning cash to shareholders, it can find its way to more productive investments.

In addition to the specials, there are many regular dividends being paid this month rather than next.  I recently initiated positions in Disney (DIS) for 1.5%, Reynolds American (RAI) for 1.2%, Williams Cos. (WMB) for around 1%, and Fastenal (FAST) for a similarly sized 1%. The table below shows the most attractive coming up this week.

HollyFrontier (HFC) is my dividend champ of the year, supplanting my old favorite Limited Brands (LTD). HFC has been aggressive in returning copious amounts of cash to shareholders, in both the regular and special dividends.  This table shows all the payouts they have made this year, rewarding shareholders with tons of cash, as well as a stock that is up 80% this year.

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