How to spot a potential special dividend stock
These 7 companies are prime candidates to announce payouts before year's end.
During the last three months of 2010 -- the last time the Bush tax cuts were set to expire -- more than 150 companies announced special dividends.
To guard against a rise in tax rates now, several companies are likely to announce special dividends during the last months of 2012 to take advantage of the current 15% rate.
But there is evidence that investors bid up the price of a stock significantly between the date a special dividend is announced and the ex-dividend date.
Bottom line: Special dividends can create trading opportunities! The key is to buy the stock before the special-dividend announcement and that is why the list of stock candidates below should be of interest to investors.
Since corporate executives don't always have the average shareholder's financial interest as a top priority (unfortunately), I believe a company is more likely to issue a special dividend if corporate insiders own a large chunk of company stock and would personally benefit from the dividend payout.
The company must also generate enough cash to pay a large dividend and not be burdened by a lot of debt. Consequently, I screened for stocks where:
- Insiders own at least 30% of shares outstanding
- Free cash flow is greater than 10% of the stock’s market cap
- Debt-to-capital ratio is less than 30%
- NCI Inc. (NCIT), which is involved in cybersecurity software.
- GameStop (GME), the video game retailer.
- ManTech International (MANT), which is involved in electronic warfare.
- Nasdaq OMX Group (NDAQ), the securities exchange operator.
- Molina Healthcare (MOH), which provides Medicaid insurance plans.
- Legg Mason (LM), a money management firm.
- Cross Country Healthcare (CCRN), a healthcare staffing and outsourcing company.
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With the universe of this category in its seasonal sweet spot, these picks have tailwinds propelling them into the new year.
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