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Regardless of who wins the White House this election year, companies are set to return value to shareholders in the form of special dividends due to upcoming tax changes.
Over the next three months, Goldman Sachs (NYSE:GS) predicts that corporations will issue a record amount of special one-time dividends, because tax rates are set to rise in 2013. The current 15 percent tax rate is scheduled to expire at the end of this year, which could result in dividends being taxed as high as 43.4 percent for some investors.
“A well capitalized corporate America, flush with cash, and a potential shift, regardless of party, in the tax rate higher in 2013 augur a wave of special dividend announcements,” explains Robert Boroujerdi of Goldman Sachs, in a research note. “Combining the year-to-date special dividend announcements with the traditional 4Q trend, we expect 2012 to set a record.”
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Nearly half of the special dividend announcements since 2000 have occurred in the last quarter of the year. Furthermore, a similar situation involving dividends and tax policy has been seen in the past. When the Bush tax cuts were first set to expire at the end of 2010, corporations paid double the amount of special dividends that were issued in the previous year. Late-year negotiations eventually extended the tax cuts into 2012.
Equity researchers at Goldman also note that since 2000, over 75 percent of corporations that issued a special dividend outperformed the S&P 500 in the two days post. “The average outperformance over the two days and the three months following the announcement was 330 basis points and 380 basis points, respectively. On the ex-date, the average stock declined by less than what was indicated.” Goldman believes the best candidates for declaring a special dividend later this year include companies such as Mastercard (NYSE:MA), Las Vegas Sands (NYSE:LVS) and General Dynamics (NYSE:GD).
Investors looking for a more steady stream of regular dividends and growth, may also want to consider technology names. The Technology Select Sector SPDR (NYSEARCA:XLK) has outperformed the S&P 500 all year, and the tech sector now accounts for more dividends than any other S&P 500 group. Technology stocks paid 5.6 percent of the total dividends in the United States five years ago, but now account for 13.2 percent of all U.S. dividends. Major tech giants such as Apple (NASDAQ:AAPL), Cisco (NASDAQ:CSCO) and Microsoft (NASDAQ:MSFT) have all increased their dividends this year.
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