If one thing moves the markets these days, it's talk about the looming Fiscal Cliff. Aside from the automatic spending cuts, one of the key points about the fiscal cliff for investors is how dividends and capital gains will be taxed going forward. Investors have been treated to historically low taxes on these gains, and many analysts estimate that their "qualified" status could be lost no matter what agreement is made by Congress. That's a big deal, considering funds like the iShares Dow Jones Select Dividend Index (ARCA:DVY) have become portfolio staples for many retired investors.
While portfolios brace for higher tax rates on dividend payments next year, a few companies have thrown investors a bone and taken steps to soften the blow. For those looking for income, these earlier and special payers could be a great way to front load income in the new year.
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Surging Special Dividends
With Congress set to let the Bush era tax cuts expire and levy new fees on dividends, income investors have been thrown for a loop. The tax rate for qualified dividends currently sits at a historically low 15%. However, that number is poised to jump back to ordinary income rates, which top out at 39.6%. The low tariff, coupled with historically low interest rates, has made stock dividends the number one place for many retired investors to find income. The record $3 trillion on companies' balance sheets hasn't hurt either.
Faced with higher potential taxes, some companies are doing right by their shareholders by pushing up their year-end payments to occur in the last weeks of 2012 - making them still eligible for the 15% rate - or by handing out special one-time large dividends. According to Bloomberg, from the end of September to mid-November, 59 different firms in the broad Russell 3000 have declared a one-time cash payment to shareholders. That number swelled to 100 this week, with bulk retailer Costco (Nasdaq:COST) becoming one of the latest to do so. Only 15 firms in the Russell paid special dividends in 2011. The pending fiscal cliff was cited as the number one reason for the payouts. Overall, data provider Markit estimates that 30 more companies will announce roughly $14 billion worth of special dividends by the end of December.
At the same time, the cliff is affecting the payout of regularly scheduled dividends as well. For example, Walmart (NYSE:WMT) announced that it will move its fourth-quarter dividend to December 27 rather than previously scheduled January 2. All in all, if Congress takes no action to reform the tax code before the end of the year, these moves save shareholders millions of dollars in taxes.
Front Load Your Income
For investors that require income in 2013, buying the special dividend payers could be a great strategy to front load their needs in the new year - all while paying fewer taxes. This dividend capture strategy is sometimes used by professional money managers to boost income and returns. Here are some of the bigger payers for the cliff.
With zero debt and a hefty cash balance, recreational vehicle component and manufactured home maker Drew Industries (NYSE:DW) could be an interesting income bet. The firm has approved a special cash dividend of $2 per share of common stock payable on December 20. The record date is December 10.
Investors may want to give meat processor Tyson (NYSE:TSN) a go as well. The firm has declared its first special dividend since 1977 and raised its regular quarterly payout. Both the 10 cents per share special dividend and new quarterly dividend of 5 cents will be paid before the end of the year on December 14.
Finally, the retailers may have had a good Black Friday based on the number of special "cliff" dividends in the sector. Department store operator Dillard's (NYSE:DDS) has moved its Q4 dividend to December 7 and agreed to pay a special one-time $5 cash dividend. Likewise, edgy teen clothing store Buckle (NYSE:BKE) has moved up its Q4 dividend payment and announced a $4.50 one-time dividend for December 21. Not to be outdone, Hot Topic (Nasdaq:HOTT) moved up its Q4 payout into 2012.
The Bottom Line
With the fiscal cliff quickly approaching, higher taxes on dividends are almost assured. However, income investors may not need to fret completely. A whole plethora of firms are paying special dividends and moving up payments so shareholders can save. By betting on these firms, investors can front load their income needs and pay fewer taxes. The previous picks, along with Brown-Forman (NYSE:BF.A, BF.B), make ideal selections to do just that.
At the time of writing, Aaron Levitt did not own shares in any company mentioned in this article.