Costco joins firms issuing special dividend payments this year
NEW YORK — Hoping to save shareholders money, Costco joined a growing list of companies issuing dividend payments this year, rather than waiting and seeing if tax rates rise as Congress wrangles over the “fiscal cliff.”
The warehouse retailer said Wednesday that it would pay shareholders a special dividend of $7 a share before the end of the calendar year, “our latest effort in returning capital to our shareholders,” said Chief Financial Officer Richard Galanti.
Dividends, which are profits made from investing in stocks and bonds, are currently taxed at a rate of 15% for the top four tax brackets, and 0% for the bottom bracket. If Congress does not act, rates will jump to as high as 39.6% for the top bracket.
Moving up dividends and making special one-time dividend payouts makes sense because even if Congress and President Obama reach a compromise, taxes on dividends could still go up — though not as much as they would under the fiscal cliff, said Tony Cherin, a finance professor emeritus at San Diego State University.
Wal-Mart Stores Inc., Hot Topic Inc. and Dillard’s Inc. are among retailers that have said they would pay their dividends this year rather than next year. Retailers usually end their fiscal years in January, so many don’t usually pay dividends until then.
Other companies may also move up their dividend payments, especially under pressure from their biggest shareholders who could lose millions of dollars if taxes on dividends rise.
“I wouldn’t be surprised to see Microsoft, Cisco and Apple take advantage of this as well,” said Randy Warren, chief investment officer of Warren Financial. “That’s going to happen in the next couple of weeks.”
On Wednesday, Walt Disney Co. also said that it would pay its annual dividend in December, and that the dividend of 75 cents was 25% higher than it was the previous year.
Paying dividends early limits companies’ access to cash, which can be problematic if they’re trying to make big purchases. But most companies have been hoarding cash during the recession, and probably won’t worry about paying out large sums, Warren said. Few are making big acquisitions now anyway because of uncertainty in the economy.
Many of the people who will benefit most from early dividends payouts include the super wealthy who own lots of stock in big companies such as Wal-Mart. The Walton family, for instance, owns about half of Wal-Mart’s stock.
But the uncertainty around what tax rates will be next year is wreaking havoc for people such as retirees, who depend on dividends for their income, said Edward Karl, vice president of taxation at the American Institute of Certified Public Accountants.
They also worry about a 3.8% tax on investment income of high-income earners that goes into effect in January as part of Obama’s healthcare plan, he said.
The fiscal cliff has turned all sorts of planning upside down, he said. Financial advisors often tell clients to defer their income. But this year they’re telling them to accelerate it because of the uncertainty about taxes. They’re also telling clients to consider selling some stocks, rather than wait a few months, to avoid higher taxes on those profits as well.
That may lead to an increase in stock market activity as people sell off assets, unless the uncertainty around taxes is resolved.
“There’s likely to be a flurry of activity over the next month,” Karl said.
Negotiations over the fiscal cliff continue. The Senate has passed President Obama’s proposal to extend middle-class tax cuts, but House GOP leadership disagreed publicly Wednesday on whether to vote on the measure.
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