Daily Gains Letter

Read This If You Want to Avoid Some Taxes

By for Daily Gains Letter | Jan 8, 2013

DL_John_2The fiscal cliff is currently dictating the trading action in the equities market, as we near the year-end when the Bush-era tax cuts are scheduled to come to a halt.

For income investors, it’s a time of nervousness, as there’s wide spread fear that there will be a significant jump in taxes, including those on dividends for dividend paying stocks.

The prevailing dividends tax rate of 15% is extremely accommodative to income-seekers, but under the fiscal cliff, we could see the tax on dividends surge to the extraordinary tax rate of 39.6% for the highest tax-bracket earners.

For dividend investors like you, this means a massive jump in taxes in 2013 and beyond.

With the uncertainty of whether the fiscal cliff will be resolved prior to January 1, numerous U.S. companies are declaring special dividend payments to their shareholders to avoid a potential massive tax hit by investors in the future years under the fiscal cliff.

These companies, whether or not they have historically been big dividend payers, are doing what they can to help shareholders by paying big dividend payments now under the lower taxes.

Just take a look at the numbers. In the period from the end of September to mid-November, Bloomberg says that 59 companies belonging to the Russell 3000 Index announced special cash dividend payments versus 15 companies in the same timeframe in 2011. (Source: “Special Dividends Surge Fourfold as U.S. Tax Increase Looms,” Bloomberg Businessweek, November 19, 2012.) The move to initiate special dividend payments is not a surprise, and I expect the dividend payments to continue, unless a deal is struck.

Assuming the fiscal cliff is coming, as an investor, you want to try to receive some dividend payments this year at the lower tax rates.

Costco Wholesale Corporation (NASDAQ/COST), which usually pays annual dividend payments of $1.10 per share, announced that it was paying a special dividend of a whopping $7.00 a share, or seven percent of its prevailing share price. That’s around $3.0 billion in payouts, but the company is looking to what benefits its shareholders. Companies like Costco that have strong cash reserves, $4.9 billion in this case, will be looking to pay out some cash to shareholders at this time before rates ratchet higher.

The special dividend payments are not limited to the large-cap stocks. Small-cap Movado Group,Inc.(NYSE/MOV), armed with about $156 million in free cash, declared a special dividend of $0.75 a share to be paid in December.

Other companies announcing special dividend payments that you can still get in on include Wynn Resorts, Limited (NASDAQ/WYNN), offering an $8.00 special dividend; Las Vegas Sands Corp. (NYSE/LVS), offering a $2.75 special dividend; and Dillard’s, Inc. (NYSE/DDS), offering a $5.00 special dividend.

And then there’s Apple Inc. (NASDAQ/AAPL). The company pays out $1.10 per share in annual dividends, but with nearly $30.0 billion, or $30.97 per share, in cash, I wouldn’t be surprised if Apple soon decides to pay out its own special dividend payments. But then, Apple may decide it needs to look toward the future and hold onto the cash.

One of the richest companies out there is Google Inc. (NASDAQ/GOOG), with net cash of over $37.0 billion. The company is not a regular dividend payer, but I wonder if there may be a special dividend in the works

As the deadline approaches, I expect to see more companies declare special dividend payments to help income investors.

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