Understanding Special Dividends

Special dividends, also known as extraordinary dividends, are one-time payments made by companies to shareholders due to specific financial events, like windfall profits or asset sales. Unlike regular dividends, they are not part of a fixed schedule but arise from unique circumstances that temporarily boost a company's cash reserves.

Companies issue special dividends for various reasons, such as excess cash from successful operations or favourable economic conditions. This surplus is distributed to shareholders instead of being retained. Special dividends also offer tax efficiency, providing a more effective means to return cash to shareholders without committing to a long-term increase in regular dividends.

Beyond financial benefits, special dividends can strategically enhance shareholder value, attract investors, and positively impact the company's stock price, demonstrating financial strength and confidence in future prospects.

Important dates to consider 

• Declaration Date: The day the company announces the special dividend, specifying the amount, payment date, and record date.
• Last Date to Trade (LDT): This is crucial. If you want to be eligible for the special dividend, make sure to buy shares on or before the LDT, typically two business days before the record date.
• Ex-dividend date: This is the date on which a stock begins trading without the dividend included in its price. If you buy shares on or after this date, you won't receive the upcoming dividend payment
• Record Date: Only shareholders on record by this date receive the special dividend.
• Payment Date: The day the special dividend is distributed to eligible shareholders.

Investors who sell their shares after or on the ex-dividend date will not be eligible for the upcoming dividend payout, while those who buy before or on the last date to trade will be eligible for the upcoming payout.

In the American market, if the special dividend is 25% or more of the stock value, special rules come into play. In such cases, the ex-dividend date is postponed until one business day after the dividend is paid.

If an event involves a due bill that represents an assignment of the right to receive the special dividend, the ex-dividend date occurs after the record date. The purpose of the due bill is to guarantee that shareholders receive payments based on the ex-dividend date, even if the stock is traded after the record date.

Trivago N.V. is one of the most recent examples. The company declared a special dividend, where the ex-dividend date was a day after the payment date. Shareholders who sell their shares before the ex-dividend date will be selling their rights to receive the special dividend. See the full announcement here.