Special Dividends Pack a Punch

Remember when Microsoft (MSFT) paid shareholders a one-time $3 per share dividend in 2004? Well many other companies are distributing their excess cash to shareholders in the form of a special one-time dividend. For example Ashland (ASH) Saks (SKS), Emmus Communications (EMMS) and Banta (BN) will send their investors special dividend checks in the next few months.

Alpine Dynamic Dividend (ADVDX) boosts its dividend yield to nearly 13 percent by regularly capturing special dividends. The fund managers pick well-managed companies with good balance sheets to ensure their picks do not collapse in price after the special dividend is paid. Then they buy the stock ahead of the dividend and sell it shortly after it's been paid.

But you must use caution because often the stock price runs up before the dividend is paid and dips after it's paid. So you must be an agile trader to ensure your profit from the dividend gain is not wiped out by a capital loss on your trade. Also, you must hold the stock for at least 61 days to get the 15 percent federal tax rate on dividends.

Some companies pay regular supplemental dividends to boost their regular quarterly dividend. Nucor (NUE), a steel maker, will have paid two supplemental dividends by the end of 2006. Freeport-McMoRan Copper & Gold (FCX), a mining company, paid three supplement dividends in 2005 and another three in 2006.

Investors seeking extra income should watch the financial press and Web sites for announcements of special dividends.

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Posted October 22, 2006.