shapecharge / Getty Images  For example, in August 2022 Ethan Allen announced a special dividend of 50 cents per share on top of its 32-cent regular quarterly dividend. The announcement came after a stellar quarter in which the company beat expectations.

Why Companies Pay Special Dividends

Companies may pay special dividends to reward shareholders when earnings are unexpectedly high or when they’re restructuring. In 2018, Australian mining company BHP announced it would distribute US$5.2 billion to shareholders in the form of a special dividend of US$1.02 per share. The company also bought back shares worth US$5.2 billion. The funds for the special dividend and buyback came from the sale of the company’s U.S. shale oil business.

Special Dividends vs. Regular Dividends

Special dividends are unlike regular dividends, which recur at regular intervals. They are separate from, and do not increase the size of, the regular dividend. Regular dividends are, for the most part, predictable and paid quarterly. The Coca-Cola Company, for example, paid 42 cents per share to investors every three months in 2021, up 1 cent from its quarterly dividends in 2020. Based on November 30, 2021 share prices, that’s a yield of 3.2%, which is a relatively solid dividend. The amount of a company’s dividend can vary but often does not change much from one payout period to the next. In the case of Coca-Cola, quarterly dividends have generally risen by only a cent or two each year since 2013. A special dividend is often a one-time payment and might never be repeated. It should not be considered when calculating a company’s dividend yield.

Notable Special Dividends

While most companies won’t ever issue more than one special dividend, several companies have broken that trend. Camping World announced a 77-cent per share special dividend in November 2020. But the strength of the outdoor and recreational vehicle market in 2020 lifted sales enough for the company to make multiple special dividends that year. Camping World also is one of a small number of firms that have paid special dividend multiple years in a row. It’s paid dividends every year since 2016. Fulton Financial has paid special dividends for eight years in a row. It doubled its special dividend to 8 cents a share in 2021. And Territorial Bancorp has paid special dividends every year since 2012.

Disadvantages of Special Dividends

While getting extra money may seem like a good thing, there are drawbacks to the choice to issue special dividends.

Share Price Impact

Special dividends immediately cause a company’s share price to dip by the amount of the dividend. This happens with regular dividends, too, but it’s more obvious when special dividends are announced. If you sell soon after the special dividend is issued, the reduction in share price could negate the cash you earn from the dividend.

Trouble Signals

Even if a company has a lot of cash on hand, not everyone agrees that issuing a special dividend is the right move. There are other important things a company could do with the extra money to grow or improve, such as:

Make acquisitions Invest in research and development Create new product lines Increase wages or bonuses for workers Keep it as a cushion for a rainy day

A special dividend could be a sign that a company has struggled to find new investments or acquisitions. That could signal a future of poor growth. One of the most famous examples of this happened in 2004, when Microsoft announced a special dividend of $3.00 per share. At the time when its regular dividend was 4 cents a share. While shareholders were happy to receive the extra cash, they also wondered why they were receiving money instead of seeing it go to expand the business. By issuing a special dividend, Microsoft may have sent a message that it had not identified ways to generate more revenue and higher returns.

Tax Impact

Special dividends can cause problems for investors at tax time. Unlike regular dividends, which may be taxed as qualified dividends and subject to long-term capital gains tax, special dividends may be considered a mixture of capital gains, ordinary income, and return of capital. Return of capital is not a taxable event, and long-term capital gains rates are 20% max, but ordinary income tax rates are 10% to 37%, depending on your total income. Most investors can anticipate and plan for how regular dividends will impact their taxes. But special dividends often come as a surprise. This can result in a sizable, unexpected tax bill.