This point was driven home last week.
CNA Financial (NYSE: CNA), a large property & casualty insurance company, proved it was a “right” dividend stock. Before the market opened on Feb. 6, CNA declared its regular $0.25-per-share quarterly dividend. The dividend ̶ $1 per share when annualized ̶ produced a 2.4% dividend yield.
A 2.4% dividend yield is pedestrian at best, so it hardly motivates one to head to the mountain tops to exclaim his good fortune. That dividend hardly elevated CNA to a right-dividend status.
No, the $2-per-share special dividend help raise CNA’s status. The additional payment, which increased the quarterly payment eightfold, lifted the annualized yield to 7.2%.
That said, CNA’s special dividend alone failed to elevate it to “right” dividend status. CNA’s special dividend had to enhance company prospects. Upon further analysis, I thought CNA’s special dividends enhanced the company’s prospects.
CNA ended 2016 on a positive note: Net operating income had increased to $217 million for the fourth quarter compared with $202 million in the year-earlier quarter. Net operating income for the full year had increased to $824 million compared with $515 million in 2015. That was a 60% increase.
CNA reported EPS of $0.82 for the quarter compared with a loss a year earlier. For 2016, it reported EPS of $3.17 compared with EPS of $1.77 in 2015.
Looking at the cash-flow statements, I found that CNA consistently generates over $1 billion in free-cash flow annually. Not all that cash can be allocated to generate a required rate of return. Issuing a special dividend was the best alternative for the excess cash and ensured CNA would maintain high returns on invested capital.
I was convinced CNA was a “right” dividend stock. So, I sent a buy alert on Feb. 6 to subscribers to our new dividend-investing service. The subscribers who bought CNA stock on the alert locked in an immediate 5.3% yield on the $2.25-per-share quarterly dividend (special and regular).
But a mere 38 days later, they were able to lock in a 10.1% total return on their investment.
Last week, CNA Financial shares hit my sell-price target. I sent a sell alert. Investors who acted on the alert locked in a 10.1% total return. What’s more, they locked in that return in little more than a month. Their equivalent annualized return was far greater than 10.1%; it was 97%.
How can this be?
Special Dividends and Share Price Increases
Companies that pay large special dividends for the right reasons will frequently see their share price rise after the special dividend is declared. They will also see the share price rise after the special dividend is paid.
This was the case with CNA Financial and its special dividend. After the dividend was paid, the share price continued to rise. In fact, it continued to rise to a 52-week high.
Over the past nine months, I’ve issued buy alerts on special dividends that yielded 10.4%, 15.9%, 24%, and 28.2% in one-day payments. All were sold to lock in a significant holding-period return, and all generated triple-digit equivalent annualized returns.
Over the past nine months, I’ve closed 11 of 13 large special-dividend trades at a significant profit. That’s a 85% success rate.
Learn to Differentiate
That said, not every special dividend is the right special dividend to trade. In fact, few are. For a variety of reasons ̶ too much debt, too little cash flow, too poor business prospects, too little yield ̶ most special dividends are best ignored. Less than 20% of special-dividend declarations lead to a special-dividend trade.
Here’s the good news: You can learn to differentiate the right special dividends from the wrong special dividends. Better yet, you can learn how to profit from trading the right special-dividend stocks.
Ian Wyatt and I will host a free live event today at 2 p.m. EDT. Click here to learn how to collect big dividend yields and big total returns trading the right special-dividend stocks the right way.