Why Santa's Arriving Early for Dividend Investors
Santa is spreading holiday cheer early this season. For some investors, stockings will be stuffed with dividends in December, one month ahead of schedule. Is it simply because we dividend investors made the nice list this year? Or is Saint Nick speedily sliding down the chimney for other reasons?
'Tis the season of giving
Several companies will pay out fourth-quarter dividends to shareholders in December instead of the regularly scheduled January payout date. For example, Missouri-based industrial manufacturer Leggett & Platt (NYS: LEG) , which has increased its dividend every year for more than four decades, decided to move up its dividend to December. Other companies will gift shareholders with a special one-time cash dividend by year-end.
The reason? They want to spare investors from having a bigger chunk of their dividend income taken away by the Grinch (in this case, Uncle Sam). As it stands, taxes on dividends are slated to increase next year unless Congress averts the fiscal cliff by extending Bush-era tax cuts. Among the changes that'll most impact dividend investors:
- Qualified dividends will be taxed at an individual's marginal tax rate, up from the current 15%.
- Marginal tax rates will rise to 15%, 28%, 31%, 36%, and 39.6% in 2013, up from the current 10%, 15%, 25%, 28%, 33%, and 35%, respectively.
- Maximum long-term capital gains tax will revert to 20%, up from the current 15%.
By granting us dividends this year instead of next, companies will potentially save us a few bucks.
Guilty of self-gifting
But let's be honest. Major shareholders want to spare themselves the tax pain, too. Insiders and board members who own a large portion of company shares stand to benefit greatly from the accelerated dividend payout. In fact, a Markit Equities Research study shows that companies with large percentages of insider holdings have been more likely to jockey dividends in order to sidestep higher taxes.
Here are a handful of companies doing some self-gifting this year.
Percent Insider Holding
Marine Products Corporation
Insiders hold more than 20% of outstanding shares for all four of these companies. It comes as no surprise that accelerated dividend moves translate into millions of dollars in potential tax savings for major shareholders. In addition, by paying these dividends this year instead of next, high earners -- like insiders -- would sidestep tax levies related to health-care reform .
According to the New York Times, the Walton family owns nearly half of Wal-Mart's outstanding shares and controls roughly 19% of the board of director seats. In total, it's estimated the family will save roughly $180 million in federal income taxes as a result of the early dividend. And Wynn Resorts served shareholders an extra helping of dividends the week of Thanksgiving. Ten-percent owner Steve Wynn was among them, the early gift estimated to save him $20 million in taxes.
A smaller fish in the corporate sea, Marine Products -- which designs, manufactures, and sells powerboats in the recreational and sport fishing markets -- is slated to pay both its regular quarterly dividend and a special year-end dividend in December. And trucking and logistics company Werner Enterprises will pay a special cash dividend to shareholders by the end of 2012. Insiders hold roughly 77% and 38%, respectively, of these companies' outstanding shares.
Benefit of the doubt
Less cynically, dividend payments could be in response to excess cash on company balance sheets. After all, S&P 500 companies hold an estimated $900 billion in balance sheet cash, up roughly 40% from just four years ago. Or companies' wish lists simply lack acquisition targets.
Some companies chose not to accelerate their dividend payment. For instance, a company may not know where its year-end profit will end up (like retailers not knowing how Black Friday sales will affect the bottom line). In these cases, the board of directors may not want to approve a dividend payout until that becomes clearer.
Foolish bottom line
Whatever their motives, companies are serving the eggnog early this holiday season. Sure, this maneuver will potentially save major shareholders a bundle. But companies are doing us dividend investors a favor too. After all, it is the season of giving.
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The article Why Santa's Arriving Early for Dividend Investors originally appeared on Fool.com.Fool contributor Nicole Seghetti owns shares of Wal-Mart Stores. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.