Many companies make very predictable fixed dividend payments each quarter. When they do, their investors have a pretty good idea of how much dividend income they'll collect each year.
However, sometimes companies will also provide their investors with bonus income by paying an annual special dividend in addition to their fixed quarterly dividend payments. Two companies with a policy of paying annual special dividends are CME Group (CME -0.66%) and Weyerhaeuser (WY -0.28%). They make great options for investors seeking passive income with upside potential.
A big-time annual income bonus
CME Group is the world's leading derivatives marketplace. It allows investors to trade futures, options, and cash to manage risk and capture opportunities.
There's some variability in the company's earnings, which led it to adopt a unique dividend policy. It pays a fixed base quarterly dividend. In addition, the company makes an annual variable dividend payment of excess cash based on its operating results, potential investment activity, and other ways it could return capital to shareholders, like repurchases.
CME Group's current base dividend rate is $1 per share each quarter. It has steadily grown that payout, including increasing it by 11% earlier this year. At the recent stock price of $171 per share, CME Group offers investors a 2.3% dividend yield, which is above the S&P 500's 1.7% dividend yield.
The company recently declared its latest annual variable dividend at $4.50 per share. That additional payout gives it a total dividend yield of 4.1%. That's the highest annual variable payment the company has made since establishing this policy a decade ago:
Data source: CME Group. Chart by the author.
With its attractive and growing base dividend, CME Group offers investors a solid passive income floor with nice upside potential from the annual variable payment.
Another sizable supplemental payment seems likely
Weyerhaeuser is one of the world's largest private timberland owners. As a real estate investment trust (REIT), Weyerhaeuser must distribute 90% of its taxable net income to shareholders to comply with IRS regulations. That causes some issues for the company, given the volatile nature of lumber and wood products prices.
This earnings variability led the timberland REIT to implement a base plus variable supplemental dividend framework in late 2020. Weyerhaeuser pays a fixed base dividend that it can sustain at lower prices. It also aims to grow that payment by about 5% annually. At its current rate of $0.18 per share each quarter, Weyerhaeuser has an above-average 2.3% dividend yield on its recent $31 share price.
In addition, the REIT intends to make a variable supplemental payment each year to achieve its target of returning 75% to 80% of its annual adjusted funds available for distribution (FAD) to shareholders. That metric is net cash from operations adjusted for capital expenditures and other significant non-recurring items. The company can also achieve that target through share repurchases.
Weyerhaeuser made its first variable supplemental dividend payment last year in two phases because of strong lumber pricing. It declared an interim $0.50-per-share payment ($375 million) in September 2021 and the final one at $1.45 per share ($1.1 billion) in January of this year. That gave it more than an 8% dividend yield at the recent stock price. The company also repurchased $100 million worth of shares, giving it a 79% adjusted FAD payout ratio for 2021.
The company will probably pay another sizable variable supplemental dividend payment for 2022. Weyerhaeuser produced nearly $2.4 billion of adjusted FAD through the third quarter. For comparison, it generated more than $2.6 billion of adjusted FAD in 2021, putting it on pace for another strong year. The company has already declared $401 million in base dividends and repurchased $404 million of its stock through the third quarter, which left it with over $1 billion to return to shareholders at the mid-point of its 75%-80% adjusted FAD target range. It will probably add to that total in the fourth quarter, though the company expects a more challenging period because of lower prices for lumber and wood products. That means investors should receive another big supplemental dividend payment early next year.
Solid base income plus a special bonus each year
CME Group and Weyerhaeuser provide their investors with an excellent base of dividend income from their fixed quarterly payouts. In addition, their dividend policies see them send investors a bonus payment each year that varies with their earnings and cash needs. That makes them compelling options for investors seeking to add some upside potential to their passive income each year.
