Thursday, December 20, 2012

Merry Christmas From Costco!

Costco also pays a special dividend this year!  Ho! Ho! Ho!

I just logged into my e*trade account and found another present under the Christmas Tree.  A $7 per share dividend as a special year-end bonus.  Costco normally pays a quarterly dividend of about 25 cents, or about 1.11% rate of return at the current share price.

I bought a while ago, so my rate of return is more like 2%, which illustrates why long-term investing can pay off handsomely compared to short-term burn&churn.

$7 a share amounts to about a 7% rate of return on the stock, which on top of the 1.11% (or close to two percent) I am getting, means a rate of return this year alone, of nearly 9%.   And who says the good old days of high returns are behind us?

That in addition to the 60% increase in stock price since I bought it - I am happy with this "Stock Pick" to be sure.

But what is going on here?  Why are companies paying out high, one-time, year-end dividends? 

Well, there are a number of explanations to be sure.  And one of them is the fiscal cliff the the looming tax increases, both in capital gains and ordinary income, for 2013.

Taxes are likely to go up in 2013.  It is just a matter of how much, and on who.  Capital gains may go to 20% under Obama's proposal.   Ordinary income rates may go up for the very wealthy.

By paying out a dividend, a company can "pay" its shareholders in income, rather than capital gains.  For people like me, in the 15% bracket, this might save me money, if capital gains rates go up.

But of course, most shareholders are in higher brackets, and paying dividends in 2012 means the income is taxed at 2012 rates, not 2013 rates.   This also means that Costco might not pay as much in dividends in coming years, to compensate for the special dividend.

Costco cited the "fiscal cliff" or more specifically, the specter of higher taxes, as the reason for the dividend payment.  But they also cited a second reason - greater access to Capital.   If you can borrow money freely, at low rates, then why hoard money in a company?   On the other hand, if money is tight, then you want to keep cash to pay for expansion, rather than borrow.

That whole free ability of capital thing again.

Having a lot of cash on your balance sheet has other problems for a company.  Like with Apple, shareholders demand a slice of the Apple Pie (sorry) and demand they pay dividends.   And if you are cash-rich, you become a takeover target, as folks on the outside see an opportunity to take over, steal the cash, and then sell the shell of the company to chumps on the NASDAQ.

Whatever the reason, it looks like a good dividend season!   Merry Christmas!