Snatch up special dividends through ETFs

The payouts from several sector exchange-traded funds will be juiced by big one-time checks.

By InvestorPlace Dec 6, 2012 2:29PM

Stocks circled in newspaper copyright Digital Vision, Getty ImagesBy Aaron Levitt

IPLOGOThe last time the U.S. faced the threat of a tax hike, the number of special dividends issued by public companies surged. With the fiscal cliff looming in the distance and the end of the Bush-era tax cuts almost assured, we're getting a sense of déjà vu.

So far, more than 280 different firms have taken the special dividend plunge, moved up their fourth-quarter payments into 2012 -- or both.

Nonetheless, trying to guess who might pay an extra dividend before the end of the year is a daunting task. Analyzing insider ownership and cash balance strength could bear fruit for investors, but it isn't a guarantee the company will pay a special dividend. Case in point, Apple (AAPL) and Microsoft (MSFT). Both fit the criteria, yet neither has announced plans for a bigger one-time payment. (Microsoft owns and publishes Top Stocks, an MSN Money site.)

At the same time, the ex-dividend dates for many of the companies that have announced their intentions of rewarding shareholders have already occurred. Meaning unless investors bounce soon, they’ll miss the boat.

So how should we plebs participate in the special dividend fever? 

The answer is as easy as E-T-F.

Standard & Poor's estimates that more than half of the companies in its benchmark S&P 500 index will announce a special payment or pay their dividends early, before the end of the year. Given that such a wide scope of stocks are doing the special dividend dance, the best way to play the trend could be with exchange-traded funds.  

These baskets of stocks offer investors a chance to participate in the payout rush without having to bet directly on a single company or time the ex-dividend just right.

While ETFs have long been a source for steady dividends -- there currently are 44 dividend-focused funds, and the iShares Dow Jones Select Dividend Index (DVY) is one of the biggest ETFs around -- the broad-based funds might not be the best way to gain a big yearly payout.

That's because certain sectors seem to be giving investors more coin than others. According to S&P data, financials, industrials, consumer discretionary and tech sectors have led the charge with regards to special dividends. However, DVY, for instance, shed much of its exposure to financial stocks after the credit crisis caused many banks to eliminate payments; the same can be said for many retail and consumer discretionary names.

Thus, focusing on sector-specific funds could lead to a big year-end payment for investors.

How to play

With financials leading the way at more than 48 companies announcing special dividends, ETFs that track the sector should get a boost in their year-end distributions.

Surprisingly, the largest special dividend announcements aren't coming from the big boys like Citigroup (C), but from smaller regional players like Commerce Bancshares (CBSH). Thus, look to SPDR S&P Regional Banking ETF (KRE) as a potential buy.

This regional banking ETF tracks 78 regional and small banks -- many of which have already committed to paying special dividends. The fund currently has a 30-day SEC yield of just 1.72%, but that will change as the stocks within the fund pay out their dividends. And there's still time -- BJK goes ex-dividend on the Dec. 21.

Likewise, investors have a more concentrated option in the PowerShares KBW Regional Banking (KBWR), which tracks just 25 companies.

It seems that high insider ownership hasn't been a gamble for investors in casino stocks. Casino plays Wynn Resorts (WYNN), Las Vegas Sands (LVS) and Churchill Downs (CHDN) have all recently announced special dividends. The Market Vectors Gaming ETF (BJK) assigns a 15% weighting to both Wynn and Las Vegas Sands. Needless to say, that weighting -- coupled with speculation that firms like Caesars Entertainment (CZR) will also announce a big one-time dividend soon -- should help boost the fund's current 1.8% in the fourth quarter. Just get in before it goes ex-dividend Dec. 24.

Finally, technology stocks remain the current champions of dividend growth. And with more than 22 companies announcing special dividends so far, income investors in the sector have a lot to smile about. The First Trust NASDAQ Technology Dividend Index (TDIV) still is the best way to hone in on the sector's future (and special dividend potential, should you get in before Dec. 21). Besides, if Mr. Softy and Apple finally do get off their duffs and pay a large one-time dividend, investors in TDIV could be smiling even more. Apple is scheduled to be included in the index -- now that it pays a dividend -- and Microsoft makes up 7% of the fund.

Special dividend madness won't be around forever, so if you do want to cash in before year's end, focusing in on these ETFs might just be the best way to do it.

As of this writing, Aaron Levitt was long TDIV.

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