Boost Your Income With Hidden Dividend Stocks

Many high-yield stocks aren't out in the open. Find out why.

Apr 26, 2014 at 11:30AM

Many investors turn to the members of the S&P 500 (SNPINDEX:^GSPC) to find solid dividend stocks with track records of excellence. But if you look at traditional screening tools, you'll miss out on a lot of stocks that pay much higher yields than most investors think. That's because special dividends have gotten a lot more popular, and companies that are unwilling to commit to high dividends quarter after quarter are more comfortable making special dividends at regular intervals to reward shareholders.

Source: Tax Credits, Flickr.

Did high yield get a bad reputation?
Over the years, many high-yield stocks in the S&P 500 have eventually had to reduce their dividend payouts, generally hitting shareholders twice as income levels fell and stock prices plunged after dividend cuts. Along atop the S&P is Windstream (NASDAQ:WIN), a rural telecom that still pays an 11% yield even as all of its peers have cut their dividends substantially and fallen well-below double-digit yield status. Even Windstream troubles many dividend investors, who points to earnings that are entirely insufficient to support the payout. Even more generous metrics based on adjusted cash flows suggest that Windstream stretches its resources in order to support its dividend, and many fear that the stock will eventually reach the breaking point.

But beyond the rural telecom segment, many of the stocks that have paid the most to shareholders over the past 12 months have done so through what the companies call special dividend payments rather than regular ones. Diamond Offshore Drilling (NYSE:DO) is the most obvious example of this; for more than three years, Diamond Offshore has paid a $0.125 regular quarterly dividend alongside a $0.75 supplemental special quarterly dividend. Shareholders can't tell the difference -- to them, the $3.50 per share annual dividend rate equates to a 6.5% dividend yield. But to many investors, the "regular" dividend yield of less than 1% makes Diamond Offshore look unattractive as a dividend stock.


Source: 401(k) 2013.

The same is true for other companies as well. CME Group (NASDAQ:CME) pays a quarterly dividend of $0.47 per share, which amounts to less than a 3% yield. But in December, it paid a $2.60 per share special dividend to investors, doubling its special dividend from the previous year and boosting its effective yield above 6%.

Why go special?
The reason why many companies choose to go with special dividends is that it gives them more flexibility to control how they return capital to shareholders. When a company establishes a regular quarterly dividend, reducing it for any reason -- even if it's completely justified -- can bring negative publicity from investors who had taken the previous payout for granted.

By contrast, the pressure to continue special dividends isn't nearly as strong. Moreover, companies can tie special dividend amounts to certain conditions or metrics much more effectively, helping make their payouts predictable to shareholders and making rises and falls less of a shock.

So when you're looking for ways to find strong dividend stocks, don't forget about companies that rely on special dividends for much of their total payouts to shareholders. Remembering those key dividend stocks can open up possibilities you never knew existed.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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