With each passing day we get a little bit closer to the looming Fiscal Cliff. The Fiscal Cliff is a combination of tax increased and spending cuts, all scheduled to take effect on Jan. 1. One part of the Fiscal Cliff is the end of the Bush-era cut in taxes on dividends and capital gains.
In 2003, President Bush lowered the tax rate on capital gains from 20% to 15%, but his tax cuts were only approved for ten years, and those ten years are getting ready to come to an end. Unless Congress and President Obama reach a deal to extend the Bush-era tax cuts (which Obama campaigned against), the capital gains tax on individuals making over $200,000 a year, or couples earning over $250,000 a year will rise to 20%.
Companies, realizing that shareholders are potentially facing a higher tax burden next year, are starting to announce special one-time dividends payable in December. So far we have seen one-time dividends announced by Wal-Mart (WMT) and Costco (COST), which sent both stocks sharply higher. Investors could really take advantage of this trend if we can predict a couple of companies that are likely to announce their own one-time dividends between now and the end of the year.
So what are we looking for? A big clue would be companies that have high insider ownership. The average S&P 500 company has an average 7.3% insider ownership, so we will look for companies with more. These companies are likely to approve one-time dividends since company insiders will be the ones that will benefit the most. We also want to examine the balance sheet to make sure that the company is cash heavy with a low amount of debt. Finally we want to look at the company’s regular dividend payout ratios, and look for companies with a low payout ratio.
Based on these criteria, let’s try to identify four companies that could potentially announce special one-time dividends in December.