A special dividend, also known as an extra dividend, is a non-recurring distribution of company assets, based on extraordinary circumstances. A special dividend often is disbursed in the form of cash to shareholders, typically of a larger size and different date than the "normal dividends" issued by the same company.
A special dividend is usually declared in the wake of a company's particularly good news—such as, say, an unexpectedly strong earnings announcement. The special dividend is a means of sharing the profit windfall with shareholders. It’s also a way for a company to demonstrate good faith with its shareholders and to show the rest of the market that its long-term footing is sound. For all intents and purposes, a special dividend is a reward to shareholders designed to engender loyalty.
However, a special dividend can serve other purposes that further the strategic interests of management. For example, a company can issue a special dividend when it wants to revise its financial structure or spin-off a subsidiary to shareholders. Corporations can choose to issue a special dividend to shareholders in order to restructure themselves more in line with a debt-based financing mix.
Whether an investor's overriding goal is conservative and income-based or not, dividends should play an important role in any portfolio. Investors of all types should seek a diversified portfolio of stocks that show consistency in raising dividends every year, which makes companies with a track record of issuing special dividends a particularly attractive investment play. Special dividends reflect stability, long-term prospects and steady management.