A dividend is a payment made from companies to their shareholders. These payments come from the earnings the companies generate from their financial activities. Most companies distribute these payments to compensate their shareholders for their investments. Paying dividends is prevalent among companies. Sometimes, however, companies may also pay their shareholders special dividends.
What is a Special Dividend?
A special dividend, as the name implies, is a dividend paid by companies on special occasions. There are no requirements for companies to pay these dividends. However, they may still make payments to shareholders if they wanted. Special dividends are non-recurring payments, usually in monetary form. These are also a higher amount compared to normal dividends. Another name for special dividends is extra dividends.
How do Special Dividends work?
Special dividends are one-time payments made to shareholders. However, the process behind it is similar to that of usual dividends. Companies pay special dividends based on the current number of shares that shareholders own. Once a company’s management realizes it has substantial cash resources that there is no use for, they may consider paying out special dividends.
Compared to regular dividends, special dividends are unpredictable. Regular dividends usually come during specific periods, such as quarterly or annually. The amount the companies pay as dividends may vary but, usually, follow historical trends. On the other hand, there are no requirements for how much companies may pay as special dividends.
Special dividends are significantly different in their nature from regular dividends. These don’t come at specific periods. Similarly, they don’t come after a company has calculated its financial performance. Investors and analysts do not consider these dividends when calculating a company’s expected returns.
Usually, special dividends come from stable companies with substantial cash resources. Other companies may use the resources for projects. However, for some companies, the cash may not suffice for projects. Similarly, some companies may not have any plans for their extra resources. Therefore, they may distribute it as special dividends.
Why do companies pay Special Dividends?
Companies don’t need a reason to distribute special dividends to shareholders. However, that does not mean these occur after usual, predictable intervals. Usually, companies pay dividends for several purposes. As mentioned above, the most common reason is to distribute extra cash reserves to shareholders for which companies have no use.
Some companies may also use special dividends to send a positive signal to the market. By paying one-time dividends, companies can give shareholders and investors confidence in their ability to make profits. Similarly, some companies going through financial structure changes may also use special dividends to restructure their capital.
What are the disadvantages of Special Dividends for companies?
While paying special dividends has its benefits, it can also be disadvantageous for companies. Firstly, by paying dividends, companies lose cash reserves. While it is not necessarily a bad thing, by investing the cash, companies can generate extra returns. Similarly, some shareholders and the market may perceive special dividends as a company’s lack of plans. It may also end up hurting the company’s future.
Aside from regular dividends, companies may also pay special dividends. However, special dividends are one-time payments. The process of special dividends is similar to regular dividends. There are various reasons why companies pay special dividends. However, it may have some disadvantages for the company.