ETFs For The Special Dividend Craze
It appears the dreaded fiscal cliff is good for something. “Something” being the spate of special dividend news investors have been treated to in recent days. Amid fears the fiscal cliff will not be settled before year-end, companies (and investors) are fearful the dividend tax rate will soar in 2013.
Those fears have prompted a special dividend outbreak as companies ranging from Las Vegas Sands (NYSE: LVS) to Costco (NASDAQ: COST) have announced special payouts to investors that will be taxed at the current dividend tax rate of 15 percent. Speaking of Costco, the warehouse store operator today announced a special dividend of $3.07 billion, thus far the largest of the special payouts to be announced.
The fiscal cliff has prompted an increase number of special dividends. Just this quarter, 63 companies have announced special dividends compared with 44 all of last year, according to CNBC. That elevated means it is tempting for investors to guess what companies will be next to unveil these lucrative payouts, but rather than play the guessing game, sector ETFs could prove to be the more practical bet. Consider the following.
Market Vectors Gaming ETF (NYSE: BJK)
Las Vegas Sands (NYSE: LVS), the owner of the Palazzo and Venetian, announced a special dividend of $2.75 per share earlier this month. That move followed a juicy $7.50 per share special dividend announced by rival Wynn Resorts (NASDAQ: WYNN) in the third quarter.
Those two companies combine for nearly 15 percent of BJK’s weight. Conventional wisdom holds that with Las Vegas Sands and Wynn being the dominant names among casino stocks, the special dividends announced by these firms could trigger similar moves from rivals that are also BJK constituents. For now, that is just speculation. However, the good news is investors can still get in on the Sands special dividend, which will be paid on December 18 to shareholders of record as of December 10.
Technology Select Sector SPDR (NYSE: XLK)
In 2012, the technology sector has become the largest dividend-paying group in the U.S. and expectations are that dividend growth in the tech space will be lucrative in the coming years. That is if the fiscal cliff is avoided.
Assuming that the boards of tech companies let fiscal cliff fears get the better of them, it is reasonable to expect multiple special dividend announcements from some of the names found in the Technology Select Sector SPDR. XLK, and the tech sector in general, make for obvious special dividend candidates for two reasons.
First, companies need to have sturdy cash positions to pay special dividends and many of XLK’s holdings are among the most cash-rich firms in the U.S. Second, another clue investors want to look for about special dividend contenders is inside ownership. For example, Microsoft (NASDAQ: MSFT) CEO Steve Ballmer is a major holder of his company’s stock. Another example is Steve Jobs’s widow being a significant shareholder of Apple (NASDAQ: AAPL).
It may sound trite, but insiders like dividends just as much as retail investors. Apple, Microsoft and Oracle (NASDAQ: ORCL) all stand as valid special dividend candidates given their robust cash positions. Those three stocks combine for about 31 percent of XLK’s weight.
First Trust Energy AlphaDEX Fund (NYSE: FXN)
The First Trust Energy AlphaDEX Fund is a “looser” special dividend candidate than the other ETFs highlighted here for a couple of reasons. First, for as much cash some of the major integrated oil names have on their balance sheets, the energy sector has not yet been heralded as a potential special dividend mecca. Second, given the massive floats of stocks such as Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), insider ownership is small on a percentage basis.
Along those lines, it must be noted FXN is home to 52 stocks and the ETF is weighted much differently than rival funds such as the Vanguard Energy ETF (NYSE: VDE) or the Energy Select Sector SPDR (NYSE: XLE). No single stock accounts for more than 3.86 percent of FXN’s, which says it will take multiple special dividend announcements to really move the needle here.
It is possible. A case can be made that roughly 20 percent of FXN’s constituents are legitimate special dividend candidates. Murphy Oil (NYSE: MUR) has already been hailed as one. Apache (NYSE: APA) can afford a special dividend as well. Even before all the fiscal cliff chatter, Diamond Offshore had a tradition of special payouts. National Oilwell Varco’s (NYSE: NOV) cash position is conducive to a special dividend as well. That is just four names, but FXN has more that could deliver the dividend goods before year-end.
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