The “Special” Dividends Most Investors Miss (Plus: An All-Time Favorite)

Did you know that dozens of companies pay dividends that go unreported each quarter?

By unreported, I’m not talking about some secret way of transferring cash to a select group of well-connected insiders. These extra payments are dished out openly and uniformly to all shareholders. But they are irregular and non-recurring. So, by definition, they are considered “special,” not ordinary.

As such, these distributions are sometimes not reflected in the yields quoted on popular financial sites like Yahoo or Morningstar. But trust me, the cash is just as green and spends just the same as any other dividend. These special payments typically come in much bigger denominations, too — often 10 to 20 times larger than the firm’s regular quarterly dividend.

Special Dividends: More Common Than You Think…

There’s no special trick or complicated system to capturing these dividends — you just have to know where to look.

Barely a week goes by when I don’t see at least one or two announcements of upcoming special payments. They don’t get much fanfare. You probably wouldn’t even notice unless you have your ears glued to the ground like I do.

But they are happening all the same. Retail. Telecom. Utilities. They can come from almost any sector.

So, where does the cash come from? Occasionally (when funding is cheap), it is borrowed. In other cases, management is preparing for a corporate restructuring or returning the proceeds from an asset sale.

But these special dividends typically come from retained profits built up on the books.

These distributions are generally random and sporadic. But not always. Some “serial payers,” as I refer to them, have a stated policy of regularly returning surplus earnings, often in the form of a year-end cash bonus.

Because operating conditions vary from year to year, the size of these payments will depend on the success of the business — the bigger the profit, the bigger the special dividend.

Last week, I told you about one of my favorite special dividend payers. But now that I’ve given you a better rundown on what they are, I’d like to share another favorite with you today…

A 7% Yield (Plus “Extra” Bonus Dividends)

Main Street Capital (NYSE: MAIN) is the only company I know that regularly pays more than one special distribution yearly.

Main Street specializes in lending capital to mid-sized private businesses. The company has about 200 positions in its portfolio, many of which it also owns an equity position. The average weighted yield on these loans (split into three categories) ranges from 8% to about 12%.

As a business development company (BDC), Main Street provides critical financing to help private businesses expand. Aside from loans, Main Street often takes an equity position that can yield some capital appreciation later, sweetening the already robust income stream.

On that front, Main Street continues to out-earn its sizeable dividend distribution. The excess is characterized as undistributed taxable income, and that bucket is occasionally dumped and spilled out to shareholders.

We’re about to get one of those payments. The board just approved a supplemental bonus dividend of $0.275 per share in December. That’s in addition to the regular monthly payments of $0.235 per share scheduled for next month.

Since going public at $15 per share in 2007, Main Street has never once reduced its monthly payout (even during the 2008 financial crash). It has also disbursed more than twice that amount to shareholders. And it has delivered a total return of more than 900%.

Source: MAIN Summary Fact Sheet

(Remember, you’ll notice that sites like Yahoo might quote a different yield. Sometimes, that figure only includes the regular dividends and doesn’t reflect the special payments. Or they may count the previous 12 payments, regardless of whether they were “special” or “regular.”)

Remember, as a business development company (BDC), the company must pass along 90% of its income to shareholders. At the current rate, investors who buy today can expect a total of $2.88 per share in regular monthly dividends over the next year. That’s good for a robust yield of 7% — even before you consider the special distributions.

Action To Take

Few reputable companies offer yields three to four times the S&P 500 average. And most that do are shaky at best. But this business development company has the financial clout to make these outsized payments.

While the primary appeal of MAIN is the dividend, the stock itself has performed quite well (as you can see in the chart above). With another dividend hike on the way, MAIN remains a strong candidate for any income investor’s portfolio.

In the meantime, if you want to know about my absolute favorite high-yield picks, you need to check out my latest report…

You’ll learn about 12 ultra-generous dividend payers that put more money in your pocket. And the best part? They pay dividends monthly. Go here to learn more now.