What Is an Accelerated Dividend?
An accelerated dividend is a special dividend paid by a company ahead of an imminent change in the treatment of dividends, such as an adverse change in dividend taxation. Companies will also sometimes pursue an accelerated dividend strategy to drive growth by sending a signal to investors that the company is making more money than it knows what to do with.
- An accelerated dividend is when future dividends are paid in a lump sum instead of steadily over time.
- Companies may issue accelerated dividends ahead of a tax policy change in an attempt to minimize the shareholder's tax bill on the dividends.
- In both the U.S. and the U.K. there have been examples of companies paying out large dividends before taxation changes.
- Accelerated dividends are a type of special dividend, but the terms are often used interchangeably.
- Companies may also issue accelerated dividends after a large cash windfall, such as after the sale of a major asset.
Understanding Accelerated Dividends
Companies in the U.S. and U.K. issue accelerated dividends when they anticipate that upcoming changes in policy or tax rules could work against their shareholders. If a proposed rule is likely to increase the tax liabilities for the average shareholder, a company may issue a one-time lump payment as an accelerated dividend before the new rules take effect.
In some cases, companies may issue extra dividends for other reasons. For example, a company with extra cash on its books might issue an accelerated dividend as a one-time reward for shareholders. A company that is restructuring, selling off assets, or spinning off a subsidiary might issue the proceeds to investors as an accelerated dividend.
U.S. dividends reached a record $522 billion in 2021, a 3.5% increase over the previous year.
History of Accelerated Dividends
Many companies go to great lengths to minimize the potential tax bill to their shareholders. Some tactics included consolidating future dividend payments into one payout and taking on debt to pay accelerated dividends.
Accelerated dividends from U.S. companies came to the forefront in the fourth quarter of 2012. During that period, numerous companies expedited dividend payments ahead of the Dec. 31, 2012 expiration of the preferential 15% tax on dividend income instituted by former President George W. Bush in 2003. The concern was that because of the fiscal cliff, the dividend tax rate could more than double for taxpayers in the highest income bracket.
U.S. companies scrambled to pay accelerated dividends in the fourth quarter of 2012, with total special dividend announcements exceeding $31 billion, an increase of more than four times the dividend payout made in the year-earlier period. In November 2012 alone, 228 companies announced special dividends, a more than three-fold increase from the 72 companies that did so a year earlier.
Fears that the tax rate on dividends could soar from 15% to over 40% for high-income taxpayers subsequently proved to be unfounded. Thanks to a last-minute fiscal cliff deal signed in January 2013, the top marginal tax rate on dividend income was set at 20% for taxpayers with an adjusted gross income of more than $200,000, or $250,000 if married and filing jointly.
In 2016, the United Kingdom introduced a new tiered dividend taxation system. This too led to accelerated dividend payments by many public and private companies.
One of the biggest dividend issuers is Microsoft (MSFT), which accounted for $1 of every $30 in U.S. dividend payouts for 2021.
Accelerated Dividends vs. Special Dividends vs. Normal Dividends
When a company pays out an unusually large dividend, this is may be called a special dividend. Such a dividend may be tied to the sale of an asset, or the company may have lots of cash and decides to funnel it back to shareholders.
If the company restructures or implements innovations that will save the company a considerable amount of money, some of those saving (resulting in greater profits) may be passed along to shareholders in the form of a dividend.
Real-World Examples of Accelerated Dividends
Seaboard Corp. (SEB) accelerated its $3 annual dividend for the 2013 to 2016 period and made a single consolidated dividend payment on Dec. 28, 2012.
Oracle Corp. (ORCL) accelerated its dividend payments for the first three quarters of 2013, consolidating its quarterly dividend of $0.06 per share into one payment of $0.18 paid on Dec. 21, 2012. Oracle CEO Larry Ellison, who owned 1.1 billion Oracle shares at the time, received close to $200 million from the accelerated dividend payment, saving over $50 million in federal income taxes.
Costco Wholesale Corp. (COST) paid out a special dividend of $7 per share for a total of $3 billion and funded it by taking on $3.5 billion in debt.
How Many Days Do You Have to Own a Stock to Be Eligible for a Dividend?
In order to be eligible for a dividend, you must own a stock for two business days before the date of record, when the company checks its records to identify shareholders of the company. The following day is known as the ex-dividend date. Shares bought on or after the ex-dividend date are not owed a dividend.
Why Would a Company Pay an Accelerated Dividend or a Special Dividend?
The most common reason to issue an accelerated dividend is if an expected tax law or policy change is likely to increase the tax liability for shareholders receiving dividends in the future. An accelerated dividend allows companies to make a substantial one-time payment to their shareholders before the new rules take effect. Special dividends may also be issued after the sale of a major asset, when the company has extra cash on its books.
How Many Times a Year Are Dividends Paid?
Most companies that pay dividends do so on a quarterly basis. However, it is also possible to issue dividends at any set schedule, such as monthly, annual, or semi-annual dividends. Many young companies do not issue dividends, preferring to reinvest the extra cash flow in growing the company.
How Much Are Dividends Taxed?
Dividends are taxed at different rates, depending on whether they are qualified or non-qualified. Qualified dividends are taxed at the capital gains tax rate, which is typically lower than ordinary income taxes. Non-qualified dividends are typically issued for common stock, and taxed at the same rate as ordinary income.