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A "perfect storm" of factors (tax, balance sheet, and financially related) are set to reward a hoard of lucky investors with a nice gift in their holiday stockings. A slew of cash-rich companies are considering gushing out special dividends at a whole new level. The market tends to overlook these special dividends, allowing alert people to take advantage of special situations before the herd. The best news is investors still have the chance to position themselves now for some Q4 cheer.

What are special dividends?

Most investors are aware of regular dividends, where companies reward investors by paying out earnings, usually on a quarterly or semi-annual basis. These regular dividends are tracked closely by many investors. Databases as divergent as Yahoo Finance and Bloomberg track dividends and yields. You can even follow the dividends of your chosen company on Seeking Alpha's portfolio page.

However, the company might go beyond the regular/scheduled distributions and declare a special dividend on top of the regular, pumping up the yield to common shareholders. These special dividends are not tracked by the normal screening systems, so companies can have radically higher dividend yields than what can be tracked through an easy screen.

Consider the effect of special dividends in the last 12 months for these companies (taken from a combination of dividend announcements and 10K filings):

Regular vs. Special Dividends

CompanyPrice

Regular

Dividend

Regular

Yield

Special

Dividend(s)

Total

Dividend

Yield

Choice Hotels

(NYSE:CHH)

$32.33$0.742.3003%$10.4134.4881%
HollyFrontier (NYSE:HFC)$17.73$0.451.4400%$1.5010.9988%
The Buckle (NYSE:BKE)$46.30$0.801.9300%$3.008.2073%
Limited Brands (LTD)$51.74$1.001.9300%$1.003.86%
Daktronics, Inc. (NASDAQ:DAKT)$9.72$0.23*2.37%$0.406.4814%

*Daktronics pays a semi-annual regular dividend.

Why Special Dividends Now?

The driving forces for the speculation on special dividends is the coming fiscal cliff. In early 2013, a number of tax measures expire, and automatic budget cuts take hold. Number one in the headlights for dividend investors is the tax rate. One of the Bush Era tax cuts was a reduction in the tax for dividend income to 15%.

Of the current candidates, Mitt Romney is in favor of the dividend rate remaining the same, while Obama is on record of favoring an increase. If nothing is done, the rate accelerates to as high as 39.5% for some people. Even if the elected President and the new Congress can agree on avoiding the worst of the fiscal cliff, most insiders expect the dividend tax rate will go up.

The second factor is that a lot of companies are sitting on a lot of cash right now. While some are happy to sit on their eggs, some company boards are keen to keep their investors happy. A dividend given when the tax is 15% is much better than one at say 25%, and many boards may accelerate the dividend schedules to get more in before the end of the calendar year.

This is especially true for those companies who have high levels of insider or strategic ownership. If a high percentage of shareholders are management or key stakeholders, then it is even more important to keep everybody happy.

Who Are the Candidates?

So what companies are high on the list for a possible special dividend? Choice Hotels and the Limited have both already given sizable special dividends earlier this year. Choice's was especially juicy, a $10.41 jolt coming in at over 25% of the share price at the time. It was a one timer after the company was able to refinance some older, high-interest debt and decided to send some of the extra funds shareholders way. In their July 2012 earnings call, management seemed to hint additional dividends are possible, but I am not sure.

However, here are some stocks I think still have a special dividend or two still to go before this year is out:

Cash and Insider Situation

CompanyCash Per ShareInsider Ownership
HollyFrontier$8.0516.9%
Daktronics$1.5253.7%
Wynn Resorts (NASDAQ:WYNN)$21.4131.8%
Armstrong World (NYSE:AWI)$3.6951.1%

HollyFrontier Corp. has been firing off special dividends right and left, a total of seven special dividends in the last 12 months. The latest is a $0.50/share that just went ex-div on 21 September. I expect HollyFrontier to one more this year in addition to their regular $0.15 quarterly. Cash is building up despite the flurry of dividends, so the board may be tempted to blaze off one more blast before dividend taxes increase. With over $8.00/share in ammunition, they could really make some noise.

Daktronics has given a December special dividend the last two years and can probably be considered the most reliable special dividend of this group. The special dividend was $0.40 last December, and I expect it will be just slightly higher if they do repeat themselves.

Wynn Resorts: While the stock is pricey at just under $115, it is resting on a hoard of cash that just keeps growing. I have heard and read lots of speculation that some of that cash will come out in a special dividend. To me it makes sense, but no word has leaked from the company that I know of. Any special dividend could be massive, considering the company has over $20 a share in cash in its toy box.

Armstrong World has already paid one special dividend this year - a luscious $8.15 - but it still has a strong cash position and may still declare another to shareholders before year end. This might be a little more of a stretch than the others, but the board of directors have shown that they like to reward investors. Do not expect it to be as big as the first, though, but something in the $1.00 range might be nice.

What do you think?

Source: Dividend Investors Set To Enjoy Year-End Special Bonanza