Special Dividend

The special dividend, also known as extra or non-recurring dividends,  refers to the declaration and distribution of an amount in addition to the regular dividend and is usually given when the company receives a large windfall from asset sales or other one-time events.

The special dividend amount is paid out of companies' disinvestment or sale of the company's fixed assets. That is why the amount of dividend seems to be very high compared to the regular dividend, as it is one-time or non-recurring payments made by the company. The company finalizes its decision by conducting a board meeting. It decides the amount or percentage at which the dividend will be declared and paid to the shareholders.

• The term "special dividend," sometimes known as "additional or non-recurring dividends," describes the declaration and distribution of funds over and beyond the regular payout. It is typically given out when the business experiences a substantial windfall due to the sale of assets or other one-time occurrences.
• A special dividend is more straightforward than a regular dividend, with the company declaring it first, recording it in the books, and then distributing it to stockholders. Shareholders with records receive the bonus regardless of their status.
• The business offers special dividends to shareholders, boosting profits and fostering a positive attitude.

A special dividend, as the name suggests, is a special dividend that shareholders are eligible to receive in certain special events, including the sale of assets, spinoffs, restructuring, etc. These dividends are non-recurring in nature and are often paid in cash to shareholders and comprise the extra dividend, excluding their normal share as applicable. It is a one-time payment.

Such extra dividends are paid when companies reap enormous profits or have cash in abundance and they have to share the profits with their shareholders. The companies declare such dividends following a series of steps, which include:

When a company wants to make a distinctive image in the market and has also earned profits above the management’s expectations, they decide to distribute some as a special dividend to shareholders. It’s a one-time amount declared by the company to the shareholders. It also creates a good mindset about the company’s financials, as seen from the perspective of shareholders and lenders of the company.

• When the company has surplus cash in hand and wants to reduce the same, then in that situation, the company may declare a special dividend to reduce such cash balances.
• If the company wants to change its debt and equity capital structure, it may declare a dividend to shareholders.
• It is generally seen that in a situation where the company wants to utilize surplus funds and does not want to buy back or pay out its obligations, then in that situation also, the company chooses the option of declaring such a dividend.

The rules and guidelines are much easier as compared to the regular dividend. Generally, it is seen that the company at first declares the dividend and then records the same in the books. And after that, it pays it to the shareholders of the company. In this case, the shareholder holding shares on the record date will receive the dividend, whether he is a shareholder or not, on the payment date. However, in case of a special dividend, anyone holding shares on the declaration date will receive a dividend.

Let us consider the following examples to understand the special dividend meaning better and also check how the accounting for such dividends is done:

Example 1

Suppose a company has declared a special dividend of $1 per share on its 50,000,000 shares on the date 01^st January 2020, which is payable on 15^th January 2020; then the journal entries are as follows:

The amount to be paid is $(50,000,000 * 1) i.e. $50,000,000. The company at first makes provision or transfers the due amount to the payables amount from the total reserves and surpluses available with the company. After that, the same would be paid to the company's shareholders from such a provided or transferred account. After payment of such a dividend amount, the balance remaining in the payable account would be zero as the provided amount was paid to the company's shareholders.

On 1^st January 2020 the following entry is to be passed:

On 15^th January 2020 the final entry of payment is to be passed:

Example 2

London-listed Natural Resources Company Glencore continues to look for acquisition opportunities, given its halving earnings. As a result, it announced distributing a special dividend worth $1 billion along with other additional returns, like a share buyback worth $1.2 billion until February 2024.

This decision came following the falling share prices of the firm, which recorded being down to 3.4% since July 11. The attempt is to acquire companies with similar financial status and record new highs in the coming times.

The impact of special dividends on the firm, as well as the market, is quite prominent. Listed below are some of the effects of distributing such dividends:

• The price of shares first rises then after the payment of dividends, i.e., ex-dividend the price of shares falls.
• Generally, it was seen that some shareholders buy shares of the company for the sake of receiving dividend income and sell instantly as and when the dividend is recorded in the books, leading to heavy selling of shares.
• When these dividends are declared and distributed, it gives investors a false impression of the firm running at a loss. This is because they think that the company is getting rid of its assets to wind up the business.
• The falsely predicted lack of growth opportunities makes investors lose confidence in the stocks of that firm and they skip investing in them.

Special dividend gives shareholders an opportunity to earn extra and have a share of the additional profits they reap in special events. Though it appears to be beneficial for those who expect a return on their investment, these dividends have some demerits on the market and its functioning simultaneously.

Let us have a look at the pros and cons of declaring and distributing such dividends:

Pros

• It increases the company's market share as when the company declares such a kind of dividend, the market value per share sharply rises.
• When the company declares a special dividend, that itself means that the company has fulfilled the expectations of the shareholders of the company;

Cons

• It may create an image in the mind of shareholders that the company does not have any investment opportunities.
• When the company does not have enough funds to invest such funds shortly, then in that situation also the company declares a dividend, which means special dividends have very high opportunity costs.

Both regular dividends and special dividend offer shareholders a chance to have a share in the profits of the companies they invest in. While the former is a recurring dividend that they are eligible to receive at regular intervals, the latter is a non-recurring kind of dividend that shareholders receive only in certain instances where the companies earn a lot more profits.

While regular dividends are final dividends normally paid at the end of the year and special dividends are paid on a one-time basis in a special event, interim dividends are the ones paid more than once within a financial year. Though interim dividends are much smaller amounts than normal dividends, they are still vital for shareholders.

Besides the above, there are other differences too that helps distinguish between special, regular, and interim dividends. Let us check them out:

• The regular dividend is declared by the company yearly to maintain the company's trend and is also formed under an analysis of financial results; on the other hand, the special dividend is non-recurring and is declared only once by the company. The interim dividend is paid out to shareholders based on the semi-annual income generated by a company.
• The finalization of books of accounts is mandatory in the case of a regular dividend as well as an interim dividend, but in the case of a special dividend, it does not require the finalization of accounts.
• The regular dividend can only be declared and paid after the end of the year, but in the case of a special one, it can be declared and paid at any time during the year. On the contrary, the interim dividend can be paid any time within a financial year, before the annual general meeting of the firm, and also prior to the release of the final financial statements.

This article has been a guide to what is a Special Dividend. We explain its rules, examples, vs regular dividend, vs interim dividend, advantages and disadvantages. You can learn more about financing from the following articles –

• Franked Dividend
• Liquidating Dividend Definition
• Dividend Aristocrats
• H-Shares