Ian Wyatt has another “special dividend” presentation that’s currently being heavily promoted to lure new subscribers for one of his newsletters… and like the one we looked at last year, this is a pitch for Steve Mauzy’s Dividend Confidential.
If you don’t know what “special dividends” are, they’re essentially one-time dividends that don’t imply any promise of future continuing dividend payments. Companies occasionally get into a pattern of recurring special dividends, offering a special extra dividend each quarter or each year but not calling it a “regular” dividend, mostly because that makes it easier to adjust the amount without angering investors (people expect special dividends to be irregular, they expect regular dividends to either stay flat or steadily increase, and almost always punish stocks when a regular dividend is reduced)… but mostly, they’re one-time payouts for some specific reason.
In theory, special dividends are used as a way to disburse excess capital to shareholders while regular dividends are used to disburse a portion of ongoing earnings to shareholders — some folks anticipate that if companies are allowed to bring back their overseas profits at a low tax rate, they might pay out a lot of that cash as special dividends, for example, but they’re often caused either by investors demanding that a company do something with all its extra cash, or by some sort of corporate action that leads them to have excess capital (like selling a division, for example).
Wyatt and Mauzy refer to these special dividends as providing “quick profit opportunities”, mostly because of the tendency of the stock to recover back to close to the price it traded at before the dividend payment… though that, of course, does not happen every single time. Nothing is certain in the stock market.
Stocks always adjust in price for dividend payments, and this process is both automatic and unrelated to investor sentiment — if your $40 stock is going to pay a regular 30 cent dividend to shareholders who hold it through November 9, for example, and the stock closes at exactly $40 on November 9 today, then the stock tomorrow will open without the right to claim that dividend payment, and it will open at a price of $39.70. It could immediately shift higher or lower after the open, but that dividend adjustment is automatic.
The same is true for special dividends — if that same stock declared a special dividend of $10, it would open $10 lower on the day after the dividend payment is made (large special dividends, unlike regular dividends, typically have ex-dividend dates after the actual dividend disbursement date, to make sure there’s no confusion about who gets the dividend… and before you ask, don’t waste any time trying to “game the system” with those, everyone trading around that date either gets $10 plus a $30 stock or a $40 stock, there is no secret backdoor that lets you get $10 in cash plus a $40 stock through some crafty trading scheme).
Wyatt thinks that investors are missing out on special dividends because they don’t know that (in many cases, at least), the stock is likely to recover after the drop on the ex-dividend date. So he and Mauzy recommend stocks that are paying a special dividend, which they recommend that you buy after the dividend is announced, hold through the payment and the drop in the share price, and wait until the share price recovers back to the pre-dividend price to sell.
I don’t know how often it works, but there are certainly times when it doesn’t work (like the last teaser of theirs we looked at, in 2016, for example), so this is certainly not guaranteed — you need to both have a reasonable strategy and to choose the right companies.
So what makes a company the right choice for this strategy? Here are the criteria Steve Mauzy suggests in the presentation:
- “Dividend has to be high — at least 4%
- They have to have cash available to pay dividend and have cash flow for the future as well, so the business won’t suffer
- Has to have positive free cash flow
- A financially sound capital structure
- Insiders have to have “skin in the game”
- Growing business and a bright outlook — they’re not doing this to weaken the company
And the dividend is paid from strength, not weakness”
He also suggests that Dividend Confidential will try to jump on these ideas and recommend them within 24 hours of the dividend being announced, because investors often get excited about special dividends and the stock often goes up until the ex-dividend date.
His strategy then is to hold the stock for 3-12 months after that in anticipation of the stock price recovering — he sets the “target sell” price at the level the stock traded at immediately before the dividend was paid.
They claim a strong record over the past year or two, which is not terribly surprising — the market has been going up, so the stronger companies have had a solid chance of recovering in price after the dividend payments.
As I noted above, the last teaser pitch we covered from them (“Can You Really Collect a 35% Dividend In October 2016?“) happened to have been one of their three failures that they include in their portfolio performance — so at least they do acknowledge their failed picks.
That was Syntel (SYNT), which paid a huge special dividend in the Fall of 2016 and never recovered (it also, for some reason, is a stock they didn’t hold for long — they did not wait for it to recover. I’m not sure what their “it’s not working out, sell at a loss” strategy is — it could just be a stop loss, since Syntel did have another big leg down in the weeks immediately after their special dividend payment (the special dividend was $15, so the shares dropped immediately from $42 to $27, but then a few days later they dropped again down to $20).
So what’s the 41% dividend stock they’re pitching this time? That’s almost certainly Warrior Met Coal (HCC), a company that mines metallurgical coal in Alabama. They announced that they would be issuing debt in order to pay out this special dividend a few weeks ago, and it is now official — and the dividend will be $11.21 per share, to be paid on November 22 with an ex-dividend date of the next trading day, N