There's nothing quite as satisfying as hearing a company you're already invested in will be distributing an outsize special dividend right into your brokerage account. Just last week, investors in retail specialist Winmark
At the time of the announcement, that represented an 8.6% yield -- not the largest special payout by any means, but significant nonetheless. Since then, shares are trading up about 12% in anticipation of the payout.
This, of course, raises an important question for dividend lovers who might not already hold Winmark shares: Is it worth buying into the company after the special dividend has been announced?
A very brief history of special dividends
Typically, when an unexpected special dividend is paid out, shares are continuously bid up until investors have secured their payout... and then the bottom falls out. Investors who were already holding shares don't mind, as the price usually reverts to a price near where it was before the payout was announced.
For those who bought in because of the payout, it can mean a total wash. If you need proof, check out how Shanda Games
But because the shareholders got their hands on the dividends yesterday, shares were trading down close to 20%.
That's not always the case, though. National Presto Industries
Technology patent specialist VirnetX Holdings
But in the end, Winmark is no National Presto or VirnetX. Their special dividend is anything but regular (like National Presto), and it isn't the result of a sudden influx of cash (like VirnetX). Odds are likely that when investors secure the payment, prices will fall.
But that doesn't mean you shouldn't kick the tires
Before you move on to the next big yielder, however, it's important to check out the underlying company Winmark represents. If you've ever visited a Play It Again Sports, Music Go Round, Once Upon A Child, or Plato's Closet store, you've experienced what Winmark's franchisees have to offer.
The firm is soundly entrenched in what I like to call the "sharing economy." With consumers deleveraging and downshifting, these four stores actually represent quite a sound deal. Royalties paid to the company by its franchisees have grown by leaps and bounds lately -- with the majority accounted for by new openings of Plato's Closet and Once Upon A Child -- where used goods are bought, sold, and traded.
This greatly underappreciated company -- it has no analysts following it -- has grown revenue by over 10% per year over the last five years. Even more impressive, earnings per share have been growing at 40% per year over the same time frame.
The largest area of concern is the fact that CEO John Morgan, who is largely responsible for turning the company around since 2000, isn't getting any younger, and his eventual departure could leave serious question marks hanging over the company.
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Fool contributor Brian Stoffel owns no shares of any of the companies mentioned. The Motley Fool owns shares of National Presto Industries and Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. 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 Motley Fool has a disclosure policy.