I came across OXPS while I was researching other high yielders AGNC and NLY At first, I was shocked at seeing that the one-time special dividend is going to be $4.50. $4.50. That is over 20% in one shot. I thought what easy money this is. How is this even possible? While reading more and more, it began to make a little more sense. Especially since the tax rate on dividends is currently at a low of 15%, many investors have taken advantage of this and also it gives the insiders a way to get income without having to sell their shares while also rewarding shareholders.
It is difficult to say the type of impact that it will have long term, but Diamond Hill (DHIL) is probably the best and most recent example to follow and maybe what to expect. Options Express and Diamond Hill are also within the same industry and may be the best example to use. On September 17, 2010 Diamond Hill announced a one-time special dividend of $13 and at that point DHIL was trading at about $60. That represents a yield of about 22%, which is very nice and I am sure those holding felt the love as well. The dividend date was December 15, 2010 and on December 16, 2010, the stock was all the way up to $76, which is an increase of about 27% from the announcement of the special dividend. Then, those who bought through December 1, 2010 and held through December 15, 2010 also recieved a nice $13 dividend.
Let's say an investor bought 1000 shares at $60 with the scenario just mentioned. At $76, the day after the dividend date, that investor's investment rose from $60,000 to $76,000 and this is prior to receiving the dividend. With a dividend of $13 per share, that equates to an extra $13,000. The total increase in value from the date of the announcement to the date of recieving the dividend would have been $29,000, which equates to almost a 50% gain in about 3 months. With DHIL, it has yet to be seen how the stock will react in the coming days, but there definitely was not a huge sell off and it was worth holding the dividend especially with the tax rate on the dividend, which makes the increase even more valuable.
Another scenario on an expected selloff could have been to buy around the day of the announcement for about $60 and sell well before as the run up went to around a high of $85, which would represent an increase of about 42%. Either strategy is good, but obviously timing is key as well. Many investors may not have known about the special dividend until a week later, but those who invested in the $70's just ended up getting a nice big quick gain off of the dividend.
In the case of OXPS, on the date of the announcement on November 29, 2010, the stock was at around $18. On December 16, 2010 the stock closed at $20. So it is only up about 10% - 15% basing it throughout the day of the announcement. The announcement was for a one-time dividend of $4.50 which at the time of the announcement, it yielded greater than 25%, which seems to be an important aspect in the recent confusion as well. Even with the price now, the yield is 22.5%. It seems as if there is still a little confusion surrounding who recieves the dividend and it caused a small drop, but the explanation is that any one investor can buy all the way until the end of December 27, 2010 and recieve the dividend. In reality, an investor can hold the stock for less than a day and get a nice dividend. It is explained well in these two articles here and here.
There is also the argument that the stock will sell off in the days after investors receive the dividend, thus nullifying any gain from the dividend. This is definitely a possibility and should also ensure some short investors to pile on as well, putting increased pressure on the price. Comparing it to DHIL, it does not seem as if there is an instant downturn. Obviously, there are some differences between the two companies. First, the length of time from the initial announcement to receiving the dividend was much longer with DHIL which allowed for more uncertainty, but it seems that no matter when an investor got in on DHIL, they made out well. Also, OXPS has a much larger market cap, but their P/E is around 20.
Going through some articles on the internet in regards to special dividends, there seems to be negativity surrounding them, here are a couple:
Here is another article making mention of other companies with special dividends and some recently:
Overall, looking at the companies listed, it does not seem to really have too much of a negative effect. I am sure there are other cases in which large dividends like OXPS and DHIL have happened, but in my opinion, it is a win-win scenario for most involved. If an investor is a long term holder of OXPS, they were planning on holding regardless and this just adds to their value and it is a vote a confidence that management will give them something.
Then there are investors who try to get in early and catch the run up and maybe even the dividend. There are those who are just going to buy for the quick dividend and may be able to make a quick buck. My opinion is that many investors were and may still be confused which allowed the price to not rise too much and it presented a buying opportunity for the short term as investors want that giant dividend and it will create a nice run up and my strategy is to sell on the run up and not worry too much about the dividend. If played correctly, a one-time large dividend can create a nice, quick opportunity. I would also hope that these companies continue to value shareholders and give throughout and not just once and this seems to be the case with some of the companies. So again, this can benefit all types of investors.
Disclosure: I am long OXPS. I am only a short-term holder and I plan on selling all of my shares prior to December 29, 2010