What Is an Extra Dividend?

An extra dividend, sometimes called a special or irregular dividend, is a one-time dividend paid to a company’s 澳洲幸运5开奖号码历史查询:shareholders of record. Unlike most dividends, which are paid at regular intervals an🐈d in predetermined amounts, extra dividends are typically announced with little-to-no warning; are usually for significantly larger amounts; are nonrecurring, and are paid in cash. Companies think carefully before they announce an extra dividend, not only because of the outlay of cash but also because doing so may have other ramifications for the company.

Understanding an Extra Dividend

An extra dividend is a way for a company to share a windfall of exceptional profits directly with its stockholders. An extra dividend will have the same effect as a regular dividend on a stock’s price, which is, that on the 澳洲幸运5开奖号码历史查询:ex-dividend date, the stock price will be reduced by the amount of the dividend declared. However, because a stock’s price generally reflects all of the market’s sentiments, the price could be more oไr less than that amount.

An extra dividend is a one-time “gift” from a company to its shareholders because, for example, the company may have enjoyed strong earnings. But cash can pile up on the 澳洲幸运5开奖号码历史查询:balance sheet for other reasons, such as the company 澳洲幸运5开奖号码历史查询:spinning-off a 澳洲幸运5开奖号码历史查询:subsidiary, a department, or some assets, or b✤ecause the firm may have won a lawsuit.

Sometimes a company can issue extra dividends if it decides to change its 澳洲幸运5开奖号码历史查询:capital structure; that is, the percentage of debt versus the percentage of equity used to finance the company. By 🙈decreasing its assets (because dividends are paid out of cash), the firm's debt ratio will increase.

Many investors purposely seek out dividend-paying stocks because they offer the added benefit of a regular income stream. Regardless of whether an investor is interested in generating income, dividends play an important role in the overall performance of any 澳洲幸运5开奖号码历史查询:portfolio. And when an investor is looking for a stock to hold for the long-term, a company's wil𝓀lingness to pay extra dividends often signals that it is focused on stability, growth, and steady management.

Reasons to Pay an Extra Dividend

A company may use extra dividends strategically to show shareholders that it is confident in its long-term prospects, for example. By declaring an extra dividend, a company can also signal to the rest of the market⛎ that its footing is sound; perhaps to gain more investors, or for other reasons.

But whatever the reason, the effect of an extra dividend generally serves to engender shareholders’ loyalty toward the company. So, an extra dividend can be a bonus result of a 澳洲幸运5开奖号码历史查询:management strategy, or it can be part of the strategy, itself.

Extra dividends can also be useful for companies in 澳洲幸运5开奖号码历史查询:cyclical industries. Because these companies are affected significantly by economic changes, their earnings are unpredictable; they might post a profit in some periods and take a loss in other periods. Hence, cyclical companies can u𓆉se an extra dividend to create a hybrid payout policy.

For example, they can follow the normal dividend cycle, but whenever earnin♒gs are good in a particular period, they coဣuld distribute a portion of them via the extra dividend.

Disadvantages of an Extra Dividend

For a Company

C🦋ompanies might declare an extra dividend thinking that they will have enough cash to fund future projects even after paying the special dividend. But if a company’s judgment is wrong, then the company can risk not being able to take advantage of future opportunities because of having distributed the extra cash.

Or, the market could misinterpret a company declaring a special dividend to mean that it does not have any new projects to invest in, and this perception could drag down the stock price. Investors looking for growth would not want to be associated with a company that had no 澳洲幸运5开奖号码历史查询:reinvestment opportunities.

For an Investor

Extra dividends are not predictable. The temporary growth in a company's cash is not organic; it happens because of some special occurrence. So, for a long-term investor, the extra dividend is really not that important. It has no effect, or a small effect, on 澳洲幸运5开奖号码历史查询:valuation, and it is not considered in the 澳洲幸运5开奖号码历史查询:dividend yield calculation.

Moreover, when a company makes a special dividend payment, its stock price is immediately reduced by the amount of that payment. Sometimes, investors will try to sell their shares after receiving a special dividend payment, but if they do, they are essentially wiping out their own profits by taking a hit on the price of their shares. Also, the more investors who try to sell following a special dividend payment, the more a company's stock price will likely drop.

Although special dividends are not necessarily bad, there is no evidence that they provide any long-term benefit to investors. In effect, they are neutral and sometimes can actually be negative, especially if they result in slower long-term 澳洲幸运5开奖号码历史查询:earnings power and 澳洲幸运5开奖号码历史查询:dividend growth.

Overall, it is never a good idea to chase special dividends. Rather, it is best to stick with high-quality dividend growth stocks that have occasionally paid out an extra dividend. Just remember to always do your research to make sure that you are investing in a company for the long-term, and one that fits your own unique 澳洲幸运5开奖号码历史查询:risk tolerance, time horizon, and financial goals.

Real-World Example

A well-known example of an extra dividend is when, on Dec. 2, 2004, Microsoft (MSFT) paid out a special cash divideꩲnd of $3.00 per share for a total of $32 billion, which was worth 38 times more than its regular $0.08-per-share dividend.

On that day, Steve Ballmer, then Chief Executive Officer of Microsoft, received a dividend check for $1.2 billion; and 澳洲幸运5开奖号码历史查询:Bill Gates, the co-founder and then chair of Microsoft, also received a big check of nearly $3.4 billion in dividends. These two executives made a fortune overnight because they were invest༒ors in thᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚeir own company.

As an investor in that scenario, imagine buying 1,000 shares in a company and getting paid $0.08 per share every quarter, which is fairly common. After a quarter, you would have $80 and after a year, ꦯyou would have gained $320, which is fairly decent.

Now, imagine that one of those quarterly payments was not $0.08, but instead, you received an incredible $3.00 per share. That one payment alone would be worth $3,000, which is like getting nine years of dividend payments from 澳洲幸运5开奖号码历史查询:Microsoft in one day. And while Gates and ꦕBallmer received billions on that day in 2004, thousands of everyday investors also got checks, for $1,000, $2,000, possibly even $50,000 or more simply by being invested in Microsoft.

Can we cash in on a similar extra dividend today𝓡? That still might be possible with Microsoft, or 🉐other companies with massive amounts of cash that pay large extra dividends but it is very difficult to find the right companies.