It’s hard to find stocks that pay enough money to retire. For example, even a 3.3% dividend – generous by today’s standards – isn’t enough to turn a $ 1,000,000 into a source of income that will last forever.
I’ll save you the math. It’s only $ 33,000 a year out of a million dollars.
Fortunately, that same dividend yield is underestimated on most mainstream financial websites. In fact, this stock has paid 7.7% over the past twelve months. Which means its millionaire investors actually earned $ 77,000 in dividends.
Yes, you read that right. There was an additional $ 44,000 hidden in plain sight thanks to a “special” dividend payment.
Three types of special dividends
Most investors are familiar with “regular dividends,” which are simply recurring cash payments distributed on a regular basis – once or twice a year, usually quarterly, or when we’re lucky, monthly.
A special dividend, by comparison, is a single dividend, typically non-recurring payment. Sometimes companies pay these in addition to their regular dividends. Sometimes companies without a regular dividend will still make a special payment.
Why? There are three reasons.
Special dividend n ° 1: we had an excellent quarter (or a good year)!
Every now and then a company will post profits out of this world and decide to share the excess wealth with its shareholders.
Such was the case with Rocket Mortgage (RKT), which announced at the end of February a special dividend of $ 1.11 per share (an annual return of 5.6% on its price at the time).
It did so after an explosive fourth-quarter report, earning $ 1.14 a share against estimates of 87 cents. Those profits grew 350% year over year, and came on the heels of a 144% rise in revenue that also easily exceeded expectations.
OKAY. You and I see disappointing reports all the time, and a company rarely announces a big one-time payment. Sometimes other motives may be at play – in Rocket’s case, he was facing extremely short interest at the time. What better way to throw off a few of those shorts than to throw money at shareholders?
Special dividend n ° 2: we have left part of the company!
Another, more common reason for a business to announce a special dividend is a one-time influx of cash from the sale of part of itself.
Several of these offers will appear each year. More recently, Barrick Gold (OR) said it was offering a special dividend of 42 cents per share to shareholders, funded by the proceeds of several transactions, including the end-2019 divestment of Kalgoorlie Consolidated Gold Mines. The proposal will be voted on in May; the special dividend would represent an annual return of 2.1%, more than double the 1.8% return shareholders are getting from Barrick’s regular payout.
Special dividend n ° 3: the regular special dividend
Remember what I said earlier about dividends from foreign corporations? They pay dividends as their profits allow, resulting in completely unpredictable income. Here in the United States, dividends are much more reliable, but they are also much less flexible. Thus, if a company’s financial situation deteriorates, it is forced to make a drastic reduction, or even to suspend the dividend altogether.
But a handful of stocks are using special dividends to create a “hybrid” dividend program – one in which they offer a certain basic level of regular dividends, then regularly “top up” the payout through those special dividends when profits fall. allow.
These are the same companies that have “hidden returns”. This is because most stock controllers will not include these special dividends in their return calculations. So, scattered around the market are a bunch of seemingly moderate returns that often get super potent but go under the radar.
Let’s go. Here are three special dividend payers whose yields are higher than they appear.
Yield of declared dividend: 3.3%
Real Dividend yield: 7.7%
Recently we have highlighted a number of high dividend stocks which have been praised by the DIVCON rating system. Among them, UKTN Financial (UKTN), one of the 10 largest commercial insurers in the U.S. It is also a subsidiary of Loews Corporation
When it comes to insurers, UKTN has a lot to like. Income has been steadily growing for years without missing a beat. The result has been more erratic – annual net income has fluctuated between $ 479 million and $ 1 billion over the past six years – but that’s typical for an insurer. And very recently, UKTN was hit with a major cybersecurity attack, but so far it appears that the attack has not hampered operations; AM Best, S&P Global Ratings and Fitch Ratings all kept their UKTN ratings intact.
More importantly, UKTN’s results were strong enough to support not only a rising dividend – a dividend that went from 25 cents per share in 2017 to 38 cents per share on the first payment. of this year – but a regular special dividend for years.
This regular payout alone is a 3.3% return. Add a special dividend of 75 cents paid in March, which increases to 4.9%. That alone isn’t bad, but consider the 75-cent “top-up” to reflect the harsh environment of last year’s COVID. Typically (as for at least the past four years) this payout has been $ 2 per share. If UKTN comes back to this kind of payment, we are looking for a return of 7.7%!
But I will remind you of the basic principle of investing in any insurer:
“Companies that write smart policies… generate extra ‘float’ that they can invest each year. With long term rates in the reservoir, these companies have not been able to earn much on their unused cash. But as interest rates rise, it will provide them with a good catalyst for higher profits. “
The flip side is also true: if interest rates cool, the UKTN likely will too.
Nuveen Enhanced Municipal Value Fund (NEV)
Yield of declared dividend: 4.3%
Real Dividend yield (tax equivalent): 7.9%
the Nuveen Enhanced Municipal Value Fund (NEV) will generally invest at least 80% of its assets in municipal bonds of higher quality or not rated but judged by the manager to be of similar quality. The rest of the portfolio can buy “unwanted” munis, with half of this allocation allowed to go into munis rated B- or worse.
Nuveen uses a little leverage in this one, at around 35% of assets at the moment. It will therefore be a more bumpy course than an ETF with bread and butter. But through skillful management of this leverage and its flexible mandate, NEV has brought its competition to shame outright.
And some of those returns are bolstered by special dividends.
Nuveen’s improved municipal value currently earns 4.3%. Tack on his most recent special dividend, and that boosts the yield up to 5.0%. But to ease the situation even further, most of its distributions are tax-exempt in nature. If you are in the top tax bracket, it is a tax equivalent yield of 7.9%!
I’m sure you foam at your mouth, but try to stay your hand for now. NEV is currently trading at a 7.2% premium, compared to 3.8% discount it has been averaging over the past five years.
Capital of Main Street
Dividend yield: 6.3%
Main Street Capital (MAIN) is widely regarded as one of the best business development companies (BDCs) in the industry.
Main Street provides debt and equity solutions to lower mid-market companies and debt financing (primarily senior secured variable rate senior debt) to mid-market companies. A single MAIN share gives us exposure to 175 holding companies in dozens of industries, with no company accounting for 2.8% of total investment income and no industry accounting for more than 6% TII.
Distributable net investment income (DNII) has grown significantly over the past decade, from $ 1.25 per share in 2010 to $ 2.66 per share in 2019 – then, like most BDCs, the business has fell in 2020, with the company reporting $ 2.26 per share in DNII. Nonetheless, the steady improvement in operational performance allowed MAIN to maintain upward pressure on its regular monthly dividend while providing a pair of special dividends for years until the pandemic.
The pandemic is the perfect example of why these complementary dividends exist in the first place. Unlike other BDCs who have had to cut back on their regular payouts, Main Street’s prudent dividend program has allowed them to simply halt the flow of special dividends to conserve cash until better times come.
It remains to be seen when MAIN will resume its special dividends. But if Main Street has resumed these payments at the same rate as in 2019, we are looking at an increase in dividend income from 6.3% currently to 7.5%.
Quite a bit of one of the few blue chips in the BDC space.
Brett Owens is Chief Investment Strategist for Contradictory perspectives. For other great income ideas, get your free copy of his latest special report: Your early retirement portfolio: 7% dividends every month forever.