Can a one time special dividend by qualified for tax purposes?
When a company offers a one time special dividend can it be qualified for tax purposes? When companys post one time dividends of 25% or greater their share price is reduced on the dividend date to reflect this pay out. Can an investor qualify this dividend by holding the companys stock for the required period (two months, I believe), and then pay taxes on the dividend while taking the short term capital gains loss?
If so this would result in a much lower tax rate than paying taxes on all those short term capital gains and result in an automatic profit to the strategy. To compensate for the holding time and risk to capital, one could simply sell deep in the money call options on the underlying stock. This would put a portion of the capital back into play, and protect against a fall in the stocks price, as well as offering a small amount of income and quaranteeing an exit price and date.
Ken
Best Answer
2775 points
Oldman answered one year ago …
Yes. This is known as a "Dividend Capture" strategy, and as long as the source of the dividend was not from the company's financial investments, or from RET-like activities, then it doesn't matter if it's a "special" one time dividend of , e.g., $10.00/ share from General Maritime(GMR) this past spring, and yes in a taxable accout it still requires holding the securities for the 60+ days post dividend paid, and yes, if the dividend reduces the share price ... if it's not a destructive payout (trying to reduce cash to avoid a takeover) then, the company's share price may rise to the predividend value.
Many of the Tanker and Shipping companies, whose share prices vary seasonally, will do this, to avoid assessments on their capitalizations in the Bahamas, or Greece, or wherevever they're located. Frontline did this a few months ago.They spun off ShipFinance Ltd to avoid having a huge tax bite. They are subject to tangible and nontangible property tax in their overseas homes. P.S. GMR's stock hasn't returned to it "Pre-special dividend" value; Frontline's is close, but it might take another year.
There's a No Load fund , called Alpine Dynamic Dividend, (ADVDX) that specializes in this, and there are various newsletters that advertise dividend capture or dividend optimization. I can't recommend any of the advisories, even though I subscribe to a few. But ADVDX does have a pretty sharp and historically successful team ... but don't expect the shares to grow in NAV if the fund yields 9-10%, especially in a flat or declining market.
Answers
2775 points
Oldman answered one year ago …
One other thing to keep in mind, is the qualified dividend rate may not continue past 2010, so this might not be a long-term terrific way to play the call vs. STCL vs. dividend. My experience has only been with dividend - paying securities and Closed end funds in tax sheltered accounts. You'd also want to determine whether trading and option costs were eating into the arbitrage you propose.
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