9 stocks with surprisingly reliable special dividends

Special dividends typically are one-time windfalls for investors. But a few companies regularly weave these payouts into their broader dividend strategy.

  • By Lisa Springer,
  • Kiplinger
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Regular dividends are the bread 'n' butter of income investing. But special dividends are the icing on the cake.

Special dividends are one-time payouts that companies use in various situations. Some firms declare special distributions to share financial windfalls with investors after an asset sale or other unusual event. Such was the case during 2020 for Macquarie Infrastructure (MIC) and NortonLifeLock (NLOK). They're nice surprises for existing shareholders, but because the events triggering these payouts aren't likely to repeat, they're not a reason for new money to buy.

But some companies use special dividends much more frequently, using them as part of a conservative payout strategy that allows them to better reward shareholders during boom years without having to reduce regular payouts in leaner times.

Stocks that follow this pattern attract income investors with the potent one-two punch created by a regular (and often rising) dividend supplemented by frequent special dividends. And importantly, these kinds of dividend stocks typically fly under many investors' radar. That's because financial databases don't consider the contribution from special dividends when calculating dividend yield; a company with a 1% yield might actually deliver 3% or 4% in annual income when accounting for these frequent one-time payouts.

Here are nine great dividend stocks that have a tendency of paying special dividends. They're a rare breed indeed, and they're worthy of a bit more attention than they typically get. Each has paid multiple special dividends in recent years, and most have a history of frequently increasing their regular payouts, too.

Data is as of Feb. 17. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price, and do not include the company's special dividends

Costco Wholesale

Market value: $157.0 billion

Dividend yield: 0.8%

Most recent special dividend (per share): $10.00

Regular annualized dividend (per share): $2.80

Retail giant Costco Wholesale (COST) produced a strong fiscal 2020 (ended Aug. 30, 2020) that saw Costco grow earnings per share (EPS) by more than 9% year-over-year, prompting the company to announce a huge $10-per-share special dividend, paid in December.

That isn't unusual. This was Costco's fourth special dividend in eight years, and it was funded entirely from balance sheet cash.

Costco, the third largest retailer in the world, operates a North American network of 802 warehouse stores, including 558 in the U.S. and Puerto Rico and 102 in Canada. Costco's membership model – in which customers pay an annual fee to shop in its stores at discounted bulk rates – has been a phenomenal driver of growth in recurring cash flow. Costco has 107.1 million cardholders and has generated $3.6 billion of membership fees in the past 12 months. Membership renewals rates at 90.9% make these cash flows highly predictable.

The pandemic amplified existing trends favoring dine-at-home and one-stop shopping. That has powered Costco's results over the past year, including its more recent November-quarter performance, which showed 15% revenue growth and 38% EPS gains.

Costco's special dividends, totaling $22 per share over the past six years, are complementary to the regular dividend, which has grown 13% annually since 2004. They also help to make up for a modest yield – the $10-per-share special payout, at today's prices, would bump COST's yield to 3.6%.

The company's ultra-low 28% payout and $14 billion of balance sheet cash make Costco's dividend one of the safest around and create a long runway for future dividend growth.

COST shares are rated Buy or Strong Buy by 18 of its covering analysts. That includes RBC Capital analyst Scott Ciccarelli, who made COST one of his top picks in the retail sector for 2021 and commented that this company is well-positioned for whatever happens in the year to come.

Main Street Capital

Market value: $2.3 billion

Dividend yield: 7.1%

Most recent special dividend (per share): $0.24

Regular annualized dividend (per share): $2.46

Business development companies (BDC) could be the place to be in 2021. These financiers of small- and midsized businesses struggled throughout most of last year, but Raymond James is among the analyst outfits looking for a snapback this year.

"Though BDCs are quickly coming back to pre-COVID valuations, the rate environment today could present a different context in which BDCs are valued as they currently deliver a premium income multiple versus the major indices," writes Raymond James' Robert Dodd. "We believe the premium income yield of the BDC space compared to the broader market could present a favorable tailwind to BDC performance in the near-to-mid term."

Main Street Capital (MAIN) is a BDC that furnishes capital to midsized private companies, which it defines between $10 million and $150 million in annual revenues. Main Street has equity and/or debt stakes in approximately 180 businesses across 30 industries, with its largest investment representing just 2.9% of the portfolio.

The value of Main Street's investment portfolio exceeds $4.3 billion. The company generates reliable interest income from debt investments in client companies, which is supplemented by dividends, capital appreciation and realized gains from its equity stakes.

While Main Street doesn't raise its dividends every year, the overall growth trend in dividends, net asset value and distributable income per share (a BDC earnings metric) have been strongly positive since the last recession ended. The regular dividend – which is paid monthly, by the way – has increased by 86% since its 2007 initial public offering (IPO) and currently yields more than 7%. That distribution has traditionally been supplemented by special dividends paid semi-annually. Since the IPO, Main Street has paid dividends totaling $30.22 per share.

It should be pointed out that Main Street didn't pay out special dividends in 2020, but that's a feature, not a bug. Those special distributions are paid as good times allow, rather than paying a stretched regular dividend it has to cut in leaner times. And 2020 indeed was leaner times, with COVID effects causing distributable net income to decline for the year.

A promising sign? Despite its 2020 issues, Main Street's net asset value rose. Looking forward, BDC's superior liquidity and solid balance sheet should position Main Street to rebound in 2021 by capitalizing on new lending opportunities in its pipeline.

Territorial Bancorp

Market value: $232.9 million

Dividend yield: 3.8%

Most recent special dividend (per share): $0.10

Regular annualized dividend (per share): $0.92

Territorial Bancorp (TBNK) is a small but high-quality regional bank headquartered in Honolulu and operating 29 branch offices across Hawaii. At Dec. 31, the bank had $2.1 billion of assets, $1.7 billion of deposits and excellent asset quality despite the pandemic. Non-performing represented only 0.2% of assets. The bank's portfolio is primarily lower-risk retail, with one-to-four family residential mortgages representing 97.0% of loans.

The pandemic negatively impacted tourism last year, but over the longer-term, Hawaii remains a very attractive lending market. Visitor spending approached $18 billion in 2019, and spending in Hawaii by the military and federal government agencies was estimated at $9 billion. There are also significant construction projects underway that will create thousands of new homes.

Territorial Bancorp paid its 43rd consecutive quarterly dividend in November. Regular dividends have risen nearly 6% annually over the past three years.

In addition to the regular payout, TBNK has typically paid a pair of special cash dividends each year: a 10-cent midyear payment and a larger end-of-year distribution. While the bank put the kibosh on special dividends in 2020, and kept the regular payout steady, it paid a 10-cent special dividend in January, signaling a return to its bonus distributions. Assuming at least a similar second dividend later this year, TBNK's yield would be closer to 4.6% at current prices.

Wingstop

Market value: $4.3 billion

Dividend yield: 0.4%

Most recent special dividend (per share): $5.00

Regular annualized dividend (per share): $0.56

Wingstop (WING) operates a global chain of quick-serve restaurants specializing in chicken wings and various side dishes. The company opened its 1,500th location in November and has delivered 17 consecutive years of same-stores sales growth (sales in locations open for at least 12 months). With locations in 10 countries, Wingstop expects to drive future growth by doubling its footprint in the 44 U.S. states where it has a presence and expanding internationally.

Despite the pandemic, the company delivered impressive revenue and earnings growth during 2020. Overall sales improved by nearly 25% to $248.8 million, domestic same-store sales surged 21.4%, and adjusted net income popped by 49.3% to 73 cents per share. The company opened 153 stores last year.

The company is primarily a franchisor; 98% of its stores are owned by independent operators This asset-light business model enables Wingstop to consistently generate 20% yearly growth in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) and convert a whopping 95% of adjusted EBITDA to cash. Wingstop also has been battening the hatches by replacing existing debt with lower-cost financing.

In 2020, the company raised its payout by 27% to 14 cents per share quarterly, and announced a $5-per-share special dividend payable in December – its third special distribution in six years. For context, that $5 special payout would boost its yield from 0.4% at current prices to 3.9%. Wingstop paid special dividends totaling $6.04 in 2018, and a single $2.76 special dividend in 2016.

WING shares are well-liked by Wall Street analysts, who have 14 Buy or Strong Buy ratings on the stock, versus seven Holds. CL King analyst Todd Brooks initiated coverage with a Buy rating in December, calling WING his best-in-class restaurant pick.

"Management believes 2021 unit growth should be slightly above the long-term 10%+ target and in line with current consensus estimates (11.4%)," say Stifel analysts, who rate the stock at Buy. "Given the strong returns and considerable white space available domestically, we would not be surprised to see unit growth outpace management's expectations, as it did in 2020."

American Financial Group

Market value: $9.3 billion

Dividend yield: 1.9%

Most recent special dividend (per share): $2.00

Regular annualized dividend (per share): $2.00

American Financial Group (AFG) operates through its Great American Insurance Group subsidiary, which has been selling insurance since the 1800s. The company sells specialized commercial property and casualty insurance for businesses and fixed rate annuities. AFG ranks No. 2 in sales of fixed index annuities made through financial institutions and is the 10th largest marketer of fixed annuities overall. It also is one of just four companies rated A (Excellent) by A.M. Best for more than 110 years.

AFG has produced best-in-class returns from its property and casualty business over the trailing five, 10 and 15 years, but the real sizzle to the story is its rapidly expanding annuity business, which has been produced 17% annual asset growth since 2009.

The annuity business generates large amounts of excess capital, which AFG returns to investors through share repurchase, dividend hikes and special dividends. The company ended the December quarter with $1.2 billion of excess capital available on its balance sheet to distribute to investors.

AFG rewarded investors with a $2.00 special dividend in December and an 11% increase in its regular dividend to 50 cents per share. This marked the company's 15th consecutive year of dividend growth and the ninth consecutive year of special dividends. The size of the special payout effectively doubles the yield on AFG shares to 3.8%.

AFG shares are rated Buy or Strong Buy by four of six covering Wall Street analysts. "We expect rate-driven core combined ratio improvement and shareholder-friendly capital management to boost AFG's shares over the next 12 months," say KBW analysts, who rate the stock at Outperform (Buy).

Old Republic International

Market value: $6.0 billion

Dividend yield: 4.2%

Most recent special dividend (per share): $1.00

Regular annualized dividend (per share): $0.84

Old Republic International (ORI) is an insurance underwriter in the US and Canada operating in the general insurance, title insurance and run-off mortgage insurance segments. The company has operated for 97 years and is the country's third largest title insurance provider.

If reliable dividends are your goal, few investments can beat Old Republic. The company has paid dividends for 79 years in a row, including 39 consecutive annual dividend increases, making it an S&P MidCap 400 Dividend Aristocrat.

In addition to a long dividend history, Old Republic is attractive because of its low combined ratio (a measure of profitability for insurance companies), which has fueled consistent operating profit growth since the end of the housing crisis. ORI also has an outstanding balance sheet, and it is rated A+ by A.M. Best for financial strength.

2020 was a mixed year – net income dropped from $3.51 per share in 2019 to $1.87, though net income excluding investment effects actually grew 21.7%. But its fourth quarter was a strong one, with net income up 91.2%, and net income excluding investment effects up 59.6%.

The company paid a $1.00 special dividend to investors in January 2021, its third special dividend since 2018 (it took a break in 2020 like many other special dividend payers). Those special dividends matter – the most recent payout takes ORI's yield from 4.2% to above 9%. In addition, Old Republic raised its regular dividend by 5% in 2020 – a much faster rate of expansion than in prior years.

"Old Republic has joined the list of other nonlife insurance companies whose stock have barely outperformed despite reporting solid 4Q20 results and an improving forecast for 2021," say Raymond James analysts, who rate the stock at Strong Buy. "The earnings outlook alone should be enough to support higher annual cash dividend payouts in 2021 and 2022 which would add to the 39 year record of increasing regular annual dividends."

Camping World Holdings

Market value: $3.3 billion

Dividend yield: 0.9%

Most recent special dividend (per share): $0.77

Regular annualized dividend (per share): $0.36

Camping World Holdings (CWH) is the country's largest RV dealer. The company sells a wide assortment of RVs and camping gear, and offers RV maintenance and repair through a network of over 160 dealerships, as well as service plans, RV insurance and related resources. The company's lead shareholder is CEO Marcus Lemonis, who is well-known to investors through his CNBC TV show The Profit.

Unlike other segments of the economy, RV sales soared during the pandemic as a result of more consumers engaging in outdoor activities to escape COVID lockdowns. Camping World Holdings followed an extremely positive June quarter with record September-quarter results. Revenues increased 21% year-over-year, net income shot 337% higher and adjusted EBITDA jumped 258%.

The company targets sustainable mid-single-digit adjusted EBITDA growth over the next five years, which it plans to achieve through a combination of dealership acquisitions and new 2021 initiatives that include peer-to-peer RV rentals and mobile RV repair shops. In addition, Camping World is partnering with a manufacturer of electric trucks to create a nationwide national network of vehicle servicing facilities for battery-powered RVs.

The company declared its regular 9-cent quarterly dividend, a recurring special dividend of 14 cents per share, and a 77-cent one time special dividend, all paid out in December. CWH also paid special dividends totaling $1.13 per share in 2020 and 28 cents in 2019. The latest hike in the regular cash dividend was a 12.5% bump announced in July.

"We are raising our estimate for Camping World Holdings based on a strong finish to 2020 and brighter outlook for 2021," says Bair analyst Craig Kennison, who rates the stock at Outperform. "Big picture, the RV market remains hot as consumers pursue the outdoors, and Camping World appears to be capturing more than its fair share."

Fulton Financial

Market value: $2.5 billion

Dividend yield: 3.4%

Most recent special dividend (per share): $0.04

Regular annualized dividend (per share): $0.13

Fulton Financial (FULT) is a regional bank holding company serving customers in Pennsylvania, Maryland, Delaware, New Jersey and Virginia. The company has approximately 220 locations and $25.7 billion in assets. It offers typical banking services, including residential mortgages. and investment advisory services for individuals and corporations.

Fulton generated record June- and September-quarter results from its mortgage business, with loan growth, fee income and credit quality exceeding expectations. December-quarter loan growth was less than 1%. However, the bank plans to accelerate profit growth by implementing expense reductions that are likely to trim $25 million from annual costs. A portion of the cost savings will be reinvested in new digital initiatives.

The bank expanded its investment advisory practice in November by acquiring BenefitWorks, a retirement services firm located in central Pennsylvania that manages approximately $177 million of assets. Some of Fulton Financial's 2020 loan and fee income growth is due to its participation in the Small Business Administration's Paycheck Protection Program. The bank funded nearly $2 billion of SBA loans that were made to more than 9,400 clients.

Fulton has paid a special dividend every year since 2017, and it has had grown its regular payout each year between 2010 and 2019, though payout expansion took a pause in 2020.

FULT shares are on the upswing of late but remain off 10% over the past 52 weeks and trade at just 90% of book value. The payout is conservative, at 47% of earnings, and shares yield a generous 3.4%. The most recent 4-cent special payout, while nice, is more of a small top-up compared to other one-time distributions mentioned on this list.

Cohen & Steers

Market value: $3.2 billion

Dividend yield: 2.4%

Most recent special dividend (per share): $1.00

Regular annualized dividend (per share): $1.56

Cohen & Steers (CNS) is a global investment manager specializing in real estate assets and alternative income. The company is headquartered in New York but operates worldwide through offices in London, Dublin, Hong Kong and Tokyo. At year-end 2020, the firm managed $79.9 billion of assets.

Cohen & Speers manages a variety of institutional accounts, open-end funds and even closed-end funds (CEFs). The company's management expertise is evidenced by a track record showing 99% of its funds outperformed relevant benchmarks over the past five years and 100% of its funds outperformed over the trailing 10 years. In addition, 90% of its open-end fund assets are managed within funds receiving four- or five-star Morningstar ratings.

The firm benefited from $3.9 billion of net fund inflows during the December quarter, and $6.4 billion of market appreciation. The combined effect was a 9.5% increase in assets under management and a nearly 3% gain in adjusted EPS.

Evercore ISI analyst John Dunn made CNS a favorite pick in the asset management sector during October. He and his team think income-oriented products and alternative asset classes will be growth drivers for asset managers in 2021. He recommends that investors stick with durable names (like CNS) that have fund offerings popular with investors and financial strength.

Cohen & Steers paid a $1.00 special dividend in December in addition to its regular 39-cent quarterly dividend. That special distribution helps juice the yield to nearly 4%. CNS has paid special dividends every year since 2010 and grown its regular dividend 11 years in a row.

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