To Pay Or Not To Pay Accelerated Or Special Dividends? A Taxing Question Indeed.

by: Jeff Binkley

Late Friday two more high profile companies announced a special or accelerated dividend. Expedia, Inc. (NASDAQ:EXPE), the online travel portal, announced a $.52 per share special dividend. The Washington Post Company (WPO) announced that it will accelerate its entire 2013 dividend, paying it in one $9.80 installment on December 27, 2012.

And with Costco taking on debt to pay its shareholders a special $3 billion dividend just before Christmas (December 18 to shareholders of record on December 10) the rest of the Holiday nee Fiscal Cliff Season will make for interesting dividend announcement anticipation.

The rationale behind these dividend decisions were not stated but it's a pretty safe bet the decisions were influenced by the likelihood of the present favorable tax treatment of dividend income changing.

Ever since the Bush tax cuts of 2003 dividend recipients have paid a maximum 15 percent on their dividend payments. Unless Congress and Obama reach agreement, that historically low rate will expire just after the ball drops in Times Square. With that expiration, dividends will be taxed as ordinary income and will go up to the recipient's income tax bracket. For the highest earners, the dividend rate would jump almost 300 percent from 15 to 43.4 percent.

Time for a little thought experiment:

If you were a board director, decision maker and a substantial shareholder for a company that usually pays its dividend in January, and knowing that you could make a change with a potentially great financial benefit to yourself, your board buddies and your shareholders, what would you do? After all, if you were a shareholder of WPO, which would you rather pay in taxes: $1.47 (the current 15% rate on that $9.80 dividend?) or $4.25 (the possible 43.5% rate)?

What company will be next to accelerate their dividend? And does it make sense to own them before they do? In the case of WPO, it's a no brainer. Get next year's entire dividend right now and pay a potentially substantially lower tax bill on it. Unfortunately, the stock went up almost $5 on Friday. We'll see what the new week holds for it.

American Express (AXP), Monsanto (MON), Sysco (SYY), Aetna (AET), Intuit (INTU), Lincoln National Corporation (LNC), AT&T (T), and Yum! Brands, Inc. (YUM) all go ex-dividend in the first two weeks of January. Some of these companies have some pretty good yields too. Specifically Sysco at 3.55% and AT&T at 5.31%.

Will they be coming out with announcements of their own very soon? It's hard to say what Washington will do in the next few weeks. But it certainly will be interesting to see which and how many companies answer the "To pay or not to pay?" question in the affirmative and proactively protect their shareholders from rising tax rates.

P.S.. I didn't do spend any time (yet) to find out which good dividend companies also have substantial insider ownership rates. That research could pay dividends too. Happy hunting.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.