This finding suggests that the act of paying special dividends not only benefits the shareholders directly but also reflects positively on the overall performance and financial health of the company. By providing special dividends, these companies demonstrate their commitment to rewarding shareholders and creating value, which in turn attracts investors and boosts their stock performance. This unique strategy sets these companies apart and showcases their strong financial position and growth potential in the eyes of investors.
Market Performance in March
Just two weeks into March, the S&P 500 has already seen a decline of over 5%, with the Nasdaq Composite not far behind with a 6.5% drop. Amid concerns of a looming recession and uncertainty surrounding President Donald Trump's tariff policies, dividend-paying stocks are gaining traction on Wall Street.
The month of March has seen significant market fluctuations, with the S & P 500 down by more than 5% and the Nasdaq Composite experiencing a 6.5% decline. The Dow Jones Industrial Average, for the first time since November 2023, closed below its 200-day moving average on Monday.
Dow Jones Industrial Average's Movement
The Dow Jones Industrial Average closed below its 200-day moving average for the first time since November 2023 on Monday. In times of market turbulence, dividends can provide investors with a sense of stability. According to Todd Castagno, a strategist at Morgan Stanley, dividends play a crucial role in reducing volatility during periods of uncertainty and geopolitical risks.
Particularly, companies that issue special dividends, making one-time payments to shareholders outside of their regular dividend schedule, have shown impressive performance in the market.
Importance of Dividends in Times of Market Turbulence
During times of market volatility, dividends can provide investors with a level of stability and reduce overall portfolio risk. According to Todd Castagno, a strategist at Morgan Stanley, dividends play a crucial role in mitigating uncertainty and geopolitical risks.
Research by Morgan Stanley indicates that companies announcing special dividends outperformed the market by 4.1% in the six months following the announcement, and by 7.8% in the 12-month period thereafter. This outperformance is even more pronounced for small-cap companies, with those declaring special dividends beating the market by 5.7% in the six months following the news and by 11.1% in the subsequent 12-month period.
Special Dividends Offer Additional Boost
Companies that issue special dividends, making one-time payments to shareholders outside of their regular dividend schedule, have shown to outperform the market significantly. In the six months following a special dividend announcement, this cohort beat the market by 4.1%, increasing to 7.8% in the subsequent 12-month period.
Castagno emphasizes that maintaining a consistent ordinary dividend signals confidence to the market, while special dividends convey optimism related to various factors such as M & A synergies or extraordinary events. As a result, income-oriented investors are drawn to stocks with a strong dividend track record.
Impact on Small Cap Stocks
For small cap companies, the effect is even more pronounced. Those announcing special dividends surpassed the market by 5.7% in the six months after the news and by 11.1% in the following 12 months.
Morgan Stanley has identified several stocks that paid special dividends over the past year, including Paccar, a manufacturer of commercial trucks, and American Financial Group, an insurance company. Paccar declared an additional cash dividend of $3 per share in December, with a current dividend yield of 1.2%. Analysts are generally neutral on Paccar, with some positive sentiment from Bank of America following an upgrade to buy in January.
Stocks Paying Special Dividends
Morgan Stanley highlighted several stocks that paid special dividends in the past 12 months, including Paccar and American Financial Group. Amid concerns of a looming recession and uncertainty stemming from President Donald Trump's trade policies, dividend-paying stocks are catching the eye of Wall Street investors.
Paccar's Financial Moves
In December, Paccar's board of directors approved an extra cash dividend of $3 per share. Despite a 7% decline in shares over the last year, the company maintains a current dividend yield of 1.2%.
American Financial Group announced a special dividend of $2 per share in late February, in addition to its regular dividend of 80 cents per share. The company has a dividend yield of 2.5% and analysts mostly rate it as a hold. Despite its strong underwriting profitability, AFG faces challenges in sustaining returns in a competitive market environment.
Analyst Outlook on Paccar
While some analysts rate Paccar as a hold, others like Bank of America have upgraded it to a buy rating, citing positive earnings forecasts and attractive dividend prospects. Other companies highlighted by Morgan Stanley for their special dividends include Rayonier, a timberland real estate investment trust, RLI, a property casualty insurer, and CNA Financial, an insurance company. Each of these companies offers unique opportunities for investors seeking stable returns in uncertain market conditions.
American Financial Group's Special Dividend
American Financial Group announced a special dividend of $2 per share in late February, in addition to its regular dividend of 80 cents per share. The insurer also repurchased $50 million of its common stock year-to-date.
Analysts' Stance on American Financial Group
Despite a 2.5% dividend yield and a 2.5% drop in shares over the past year, analysts mostly maintain a hold rating on American Financial Group, noting its strong underwriting profitability.
Other Stocks on Morgan Stanley's Radar
Rayonier, RLI, and CNA Financial are among the other companies identified by Morgan Stanley for their dividend-paying strategies, each offering unique opportunities for investors.
