There is nothing new under the sun … or is there?
My research on dividends points to something startlingly new.
Over the past few months, I have delved into special dividends and the trading opportunities they offer. I’ve found a new opportunity – one I’ve yet seen explained elsewhere – for capturing outsized dividend income and significant share-price appreciation. (Click here for details on my complete research and this new trading opportunity.)
As you might expect, my research also found that not every special dividend is a trading opportunity. To the contrary, few special dividends generate high returns; therefore, few special dividends are worthwhile trades. You need the right company, with the right business, with the right capital structure. The special dividend should signal improved company prospects; it shouldn’t impede them.
This fact came to light this past week when two companies announced 30% special dividends within a day of each other.
One was a real estate investment trust that acquires and manages medical and commercial properties in the Northeast. This REIT is smallish, with a market cap under $50 million. It will fund its special dividend with cash generated from the sale of three of its properties.
This REIT is also unusual in that it doesn’t pay a regular dividend. REITs are valued primarily for their recurrent dividends.
Despite the lack of recurrent dividends, investors reacted favorably to the special-dividend announcement. The company’s shares surged 10%. Daily trading volume, which had averaged 2,000 shares before the announcement, soared to 43,000 shares the following trading session.
A day later, another 30% special-dividend announcement hit the wires. This one was from a larger company in a different line of business. This company manufactures recreational watercraft. The business differs from the REIT’s, and so does the funding for the special dividend. This company will fund its special dividend with cash on hand and a new secured credit facility.
Like when the REIT announced its special dividend, the watercraft company saw its shares surge. They traded 14% higher in the following trading session.
So, we have two similar (as a percentage of share price) special dividends. We also have two dissimilar trading recommendations.
One of these 30% special dividends I recommended our subscribers trade; the other I didn’t. One simply failed to meet the criteria I developed from my research, which focuses on the following variables that have been shown to influence a successful (or unsuccessful) special-dividend trade:
- Operating Cash Flow
- Free Cash Flow Yield
- Debt-to-Equity Ratio
- Cash Account
- Dividend Payout Ratio
- Management Guidance
- Market Liquidity
There’s more to it, to be sure. But these variables at least set me in the right direction.
To learn more about special dividends, click here. You’ll learn why trading special dividends can lead to special trading opportunities. You’ll also learn how I was able to set our subscribers in the right direction with the aforementioned 30% special-dividend payouts.