Q: I'm looking through the dividend history of a stock I'm considering and I'm a bit confused. In addition to the quarterly dividend payments, this company has made a few larger payments called "special dividends." What are these?
As the name implies, a special dividend refers to a one-time payment to investors that is not a regularly scheduled dividend. Generally, a special dividend is larger than a company's standard dividend and is declared in relation to a one-time windfall. Maybe the company sold some of its assets or had an especially good quarter. Or maybe it simply has more cash than it can realistically use to reinvest in the business. These are all common reasons companies declare special dividend payments.
For example, apartment real estate investment trust (REIT) Equity Residential declared a special dividend of $8.00 per share in March 2016, significantly more than its standard $0.50 payment at the time. The payment was a result of the company selling $6 billion worth of non-core assets, which resulted in a nice profit, and since REITs are required to distribute most of their taxable income, Equity decided to return about half of this windfall to investors.
When a special dividend is paid, you can expect the stock's price to fall by approximately the same amount after it is paid. For example, if a stock trading for $100 declares a $5 special dividend, you can expect the stock to fall to about $95 once the special dividend is actually paid to shareholders.
To be clear, this is the same thing that happens when a regular dividend is paid, but it tends to be far more noticeable with larger special dividends.
In short, a special dividend can be nice, but it's not "free money." Like any other dividend, you can choose to reinvest it or use it as income.