In theory, dividends shouldn't be big market movers. But in reality, when a company announces an unexpected dividend, investors often defy economic theory by bidding its shares through the roof. That could be the next step for the market's most valuable stock.
Why are special dividends special?
When you think about what a dividend actually does, you wouldn't think a special dividend would have any impact on a stock's price. After all, when a company pays a special dividend, it reduces its cash on hand by exactly the amount it pays out to shareholders. The net impact should be a wash.
In practice, that's often basically what happens. When VirnetX
But special dividends don't always work out that way. Microsoft
More recently, money manager Diamond Hill
Not all dividends are alike
Of course, it makes a difference why a company is paying a special dividend. In the case of VirnetX, the company had received a piece of a $200 million settlement from Microsoft related to alleged patent infringement. So the real value behind the dividend came from the settlement, and so the time when the shares should have risen was immediately after the settlement announcement.
But in other cases, such as with Microsoft and Diamond Hill, the move was more of a nonevent. It isn't as if those companies created any value with the moves -- rather, they only unlocked value that was already there.
Indeed, in some cases, special dividends are made for entirely different purposes. When Weyerhaeuser
What an Apple dividend would mean
If Apple were to pay a special dividend, the impact on the shares would tell a lot about investors' opinion of Apple's cash management. One reason a stock might go up is if investors figured that a company would otherwise waste the money that's going toward the special dividend. On the other hand, if a special dividend forecloses opportunities to spend the money more productively -- say, on a valuable acquisition -- then you can expect shares to fall.
For now, the idea of an Apple dividend is speculative at best. But as long as the company hangs on to its $100 billion, you can expect speculation to swirl.
Meanwhile, if you'd rather own stocks that already pay dividends, let us point the way toward some great ones. Let me invite you to learn about 11 dividend stocks for income-hungry investors. The report is absolutely free -- but don't wait: Click here and read it today.
Fool contributor Dan Caplinger thinks every dividend is special. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Microsoft, Weyerhaeuser, and Apple. Motley Fool newsletter services have recommended buying shares of and creating bull call spread positions in Microsoft and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy never stops paying dividends.