Big special dividends lead to big dividend yields. This is to belabor the obvious. But the right special dividends can also lead to big investment returns.
Melco Crown Entertainment (NASDAQ: MPEL) is a recent example.
Melco, a Hong Kong-based casino operator, develops, owns, and operates casino gaming and entertainment resorts in Southeast Asia. Last year, Melco generated $4.5 billion in revenue from gambling, vigorish, room & board, and entertainment.
In recent years, Melco’s efficiency at spinning its sundry revenue streams into cash has grown. By the end of 2016, Melco’s cash account had swelled to $1.7 billion, up from $1.4 billion in 2013.
Melco had too much cash on hand, and more of it was rolling in. So, Melco’s management did the right thing.
Melco’s board of directors amended its dividend policy. In the past, it would pay 30% of net income as dividends. Melco was removing excess cash, but doing so problematically. Dividends would vary year to year. Most income investors prefer stable, predictable dividends. So, management implemented a new dividend policy, starting with a $0.09 per-share quarterly dividend paid in 2017.
The Melco Special Dividend
Still, too much money was left on the books. Too much money is a drag on returns on invested capital. To keep returns on invested capital high and to remove excess cash, Melco’s board again did the right thing: It declared a $1.32-per-share special dividend on Jan. 12. The Melco special dividend produced a 7.9% yield on the prevailing market price.
I like the Melco special dividend. I thought it was a good use of company cash. I thought it enhanced current shareholder value. I also thought it signaled management’s desire to create additional shareholder value.
Melco CEO Lawrence Ho confirmed my thoughts with his thoughts, saying, “We believe that we can return a meaningful amount of capital to investors now, and in the future, while still retaining significant flexibility to pursue value accretive opportunities.”
Most important, I thought the Melco special dividend would be a profitable special-dividend trade. I was motivated to act.
Before the market open on Jan. 12, I sent a buy alert on Melco shares. Our dividend-income investors who acted on my alert bought Melco shares at a price to lock in a 7.6% yield on the special dividend.
But there was more.
Special Dividend Trades: Considerable Profits
Before Melco’s ex-dividend date, Jan. 19, I sent another buy alert. This alert advised our capital-gains investors to buy Melco shares near the market open after the share price had been adjusted lower by the special dividend.
By Jan. 25, both Melco special dividend trades ̶ dividend-income and capital-gains ̶ were closed, and both were closed at considerable profit.
Our dividend-income investors realized a 9.9% return ̶ a combination of special dividend and share-price appreciation ̶ on their investment. But their holding period was only two weeks. The equivalent annualized return was 258%.
Our capital-gains investors realized a 6% holding-period return. A piddling return you might think? Hardly. Our capital-gains trade was open only a week. Because the holding period was so short, the equivalent annualized return soared to 312%.
Care to learn more about special dividends and the opportunities they present? Then read on.
Next week, I will share details of my special-dividend trading strategy in a free live event.
If you want to collect 10% to 60% dividend yields and realize high investment returns on the right special-dividend stocks, you must join me. All you have to do is RSVP right now and then open the email you’ll receive from Dividend Alerts.
No one else offers a dividend-investing service focused on special-dividend opportunities. Since we started this special-dividend service in June 2016, we’ve closed 82% of our special-dividend trades at a profit. This is unique.
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