A special dividend is a payment made by a company to its shareholders that the company declares to be separate from the typical recurring dividend cycle, if any, for the company. Usually when a company raises its normal dividend, the investor expectation is that this marks a sustained increase. In the case of a special dividend, however, the company is signalling that this is a one-off payment. Therefore, special dividends do not markedly affect valuation or yield calculations. Typically, special dividends are distributed if a company has exceptionally strong earnings that it wishes to distribute to shareholders or if it is making changes to its financial structure, such as debt ratio.
A prominent example of a special dividend was the $3 dividend announced by Microsoft in 2004 to partially relieve its balance sheet of a large cash balance.[1]
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For special dividends, the ex-dividend date is set one stock trading day after the dividend date (the date on which dividend payment is made, typically after the record date). The stock will trade on an ex-distribution basis (adjusted for the amount of the dividend paid) on the trading day after the dividend date. The determining factor for a special dividend is usually when the dividend is 20% or greater in relation to the underlying price of the stock/security.
To be entitled to a special dividend, you need to be a stockholder on the record date. To be a stockholder on the record date, your purchase would need to have been made a minimum of two business days prior to the record date. (See ex-dividend date.)
In the case of special dividends, the stock trades from the record date through the dividend date without adjustment in value for the amount of the dividend to be paid and then adjusts for the dividend paid and starts trading on an ex-distribution basis one stock trading day after the dividend date. To be entitled to receive the dividend, it is required that you be a stockholder on the record date and hold your stock through the dividend date in order to receive the dividend. When a special dividend is being paid, selling your stock between the record date and the dividend date relinquishes your right to the dividend.
The earliest you can sell your stock and still be entitled to the special dividend is the date the stock begins trading on an ex-distribution basis, or one day after the dividend date.