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What are Special Dividends?

Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

A corporation can pay different types of dividends to its shareholders, the individuals who own its shares. In this lesson, you will learn about special dividends.

What Is a Special Dividend?

Kate owns shares in the Kid Again Toy Company who has just announced a special dividend that it will pay in August. Kate just read about this special dividend in the newspaper, but since she has never received a special dividend before, she has no idea what it is. Let's see if we can provide Kate with more information.

Public companies are those that issue shares as a way to raise money to allow them to finance new acquisitions, expand product lines or purchase large, expensive pieces of machinery. The individuals who purchase these shares in public companies are called shareholders and they are the owners of the company. Kate is a shareholder of Kid Again Toy Company.

In return for their ownership, shareholders expect to receive dividend payments from companies in regular payments. Dividends represent a portion's of a company's profit that it distributes to its shareholders. The amount of dividend payment received by a shareholder is related to the number of shares that he/she owns. Most large public companies pay dividends quarterly.

If a company had an extremely profitable year, it could issue its shareholders a special dividend, which is a dividend that it pays in addition to its regular dividend payment. A special dividend or an extra dividend is usually a one-time payment to a company's shareholders and the amount of is usually greater.

Why Issue Special Dividends?

A company would be hesitant to increase its regular dividend payment amount in an extremely profitable year as shareholders may expect that higher dividend payment to continue in the future.

Let's assume that Kate receives a regular dividend of $0.15 for each share of the Kid Again Toy Company that she owns. If she owns 1,000 shares, then she would receive a dividend payment of $150 (1,000 x $0.15).

If the Kid Again Toy Company had an extremely profitable year due to the launch of a new female action figure series, it could decide to share some of its impressive earnings with its shareholders. Instead of increasing its regular dividend payment per share, it could issue a special dividend of $1.00 per share.

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