One simple strategy income investors can implement is using special dividends to their advantage.
Here’s what you do. The first step is to scour the internet to find stocks that are prepared to pay a special dividend. These are almost always announced weeks before the payout actually happens.
The next step is to properly research the investment opportunity. You don’t want a weak stock that is paying a special dividend because it has sold part of the business. The ideal candidate is a strong company that generates so much cash it doesn’t know what to do with it.
The only thing left to do then is take advantage of the opportunity and buy the stock.
Allow me to do a bunch of the work for you. Here’s a very compelling special dividend situation that is currently playing out as we speak. But don’t delay: you only have a couple more weeks until the payout hits investor wallets on December 30.
The skinny
For years, investors avoided Genworth MI Canada (TSX:MIC) amid fears that the mortgage default insurance company would suffer under the weight of the inevitable Canadian housing market collapse.
Some extra-bearish pundits argued that there was no way the company could remain solvent in such a scenario.
Despite these issues keeping the share price depressed for years, Genworth’s management took the whole thing in stride. Sure, the company took preventative measures — like shoring up its balance sheet — but it mostly stuck to business and quietly grew the company at a steady rate.
After years of waiting for long-suffering shareholders who had to endure the stock stubbornly doing nothing, finally a catalyst came. Genworth’s parent company announced it was selling its 57% stake in the company. Shares quickly bounded from $40 to $50 each, and have marched steadily higher ever since. Shares currently trade hands at just under $57 each.
Despite the huge move, it’s easy to argue the stock isn’t really overvalued. Shares trade at just 12 times trailing earnings and a little over book value, which is cheap for such a high-quality company.
And there’s always the potential that Brookfield Business Partners — which acquired the majority ownership stake from Genworth’s former parent — will bid a premium and take the rest of the company private.
A special dividend strategy
Genworth has already paid two special dividends in 2019 as the company returns excess cash back to shareholders. It recently announced a third special dividend, this one for an impressive $2.32 per share.
Investors who get in today will also be eligible for Genworth’s regular quarterly dividend, which was just raised from $0.51 to $0.54 per share.
If we add the special dividend and the regular quarterly dividends together, it works out to $4.48 per share in income investors can expect from this stock over the next year for a total yield of 7.9%.
Remember, Genworth has already paid out $1.85 per share in special dividends so far in 2019.
Combine 2019’s already-paid dividends and the expected dividends coming up and Genworth will return $8.37 per share back to owners in 2019 to 2020 — and that doesn’t even count the company’s share buyback program. That’s one impressive feat.
The bottom line
Genworth is an excellent company that I hope to keep in my portfolio for a long time. It’s in an excellent business run by smart folks, and generates so much cash management is giving it back to shareholders seemingly as fast as they can.
If you’re looking to get in, now is a great time to do so. The special dividend should be especially appealing for income investors.
