Accelerated Dividend – Definition

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Accelerated Dividend Definition

An accelerated dividend is an amount of money paid by a company before a forecasted change in dividends occur. It is often a special dividend, a lump-sum cash payment that is paid when an adverse change is likely to occur, such as drastic change in dividend taxation.

In some cases, companies use the accelerated dividend as a strategy to tell investors about the significant income of a company in order to enhance the growth of the organization. An accelerated dividend is paid prior to the occurrence of imminent change in how dividends are treated.

A Little More on What is an Accelerated Dividend

The use of the accelerated dividend strategy by many companies in the United States became prominent in the last quarter of 2012. The total amount recorded as the lum-sum of money paid by companies as accelerated dividends as at that time was more than $31 billion. At this period, companies paid accelerated dividends ahead of a change in the treatment of dividends, especially with the expiration of the dividend taxation enacted in 2003 by the former president of the United States George W. Bush.

The expiration of the preferential 15-percent dividend tax by 2013 posed a threat as it connotes that taxpayers would pay double of what they used to pay as dividend tax rates. About 228 companies announced accelerated dividends or special dividends towards the end of 2012.

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Academics research on “Accelerated Dividends”

[PDF] Enhancing the dividend discount model to account for accelerated share price growth, Irons, R. (2014). Enhancing the dividend discount model to account for accelerated share price growth. Journal of Accounting and Finance, 14(4), 153. The Dividend Discount Model (DDM) is one of the long standing and most trusted models in financial theory. It is used in calculating the inherent value of stock and presumes constant growth for both dividends and share price. However, during the abnormal growth periods, there is nothing that explains for these periods except the use of non-constant growth methods. The article therefore, seeks to enhance the DDM to account for the accelerated share price growth. A new method is introduced which is drawn to the firm’s lifecycle and dividend policy. These in effect accounts for the periods with exceptional growth within the original DDM.

The tax structure and corporate dividend policy, Brittain, J. A. (1964). The tax structure and corporate dividend policy. The American economic review, 54(3), 272-287. The article details a preliminary report on model of corporate dividend policy which is intended to illustrate clear interesting features of dividend behavior since World War I. The first being the striking delay of aggregate net dividend from the late 30s through 1946.  It was then followed by a steady growth at roughly 6% annual rate which tripled dividends by 1962. The occurrence of this growth is noteworthy as it occurred during a period that was rather hostile and limited the inclination towards an after-tax net earnings to a 2% annual gain. The study thus focuses on two key features of tax structure that is depreciation allowance and individual income tax rates. The influence of these tax factors will be evaluated  by statistical tests such as the time series regression model.

Accounting for accelerated share repurchase programs, Pagach, D. P., & Branson, B. C. (2007). Accounting for accelerated share repurchase programs. The CPA Journal, 77(8), 36. This article discusses how companies can account for accelerated share repurchase programs. The article posits that in the 1970s, dividend payments represented up to 90% of the total investor payout. Share repurchases grew throughout the following 2 decades until 1998 when the share repurchase eclipsed dividend payouts. The author also indicates the share repurchase programs have always been complex, involving critical financial reporting considerations. Accounting for the programs has also been complex.

Effectiveness of accounting-based dividend covenants, Healy, P. M., & Palepu, K. G. (1990). Effectiveness of accounting-based dividend covenants. Journal of accounting and Economics, 12(1-3), 97-123. This article points out the effectiveness of accounting based dividend covenants. The restrictions set in the agreements or the ending contracts provide imperfect means of lessening conflicts of interests between the stockhoders and bondhoders.  This is made possible by giving the mangers the flexibility to make accounting decisions to get around the covenant. It also records firms’ accounting and dividend responses to an increase in the rigidity of dividend constraints. The degree of the dividend cut is in relation to the rigidity of the dividend constraint. This recommends that accounting based covenants are effective measures for bondholders to put in check a firms’ dividend policies.

Sizing up the peace dividend: economic growth and military spending in the United States, 1948–1996, Ward, M. D., & Davis, D. R. (1992). Sizing up the peace dividend: economic growth and military spending in the United States, 1948–1996. American Political Science Review, 86(3), 748-755. The article reviews the connection between military expenses and the economic growth in the United States from 1948 to 1990. This is significant in estimating the potential peace dividend. The findings of the article put forward that military expenses is a significant drain in the economy. The implications of a reorganized international system for the U.S military spending and their subsequent impact on the economic growth in the 1990s is further analyzed. Replications of Democratic and Republican proposals for cuts in military expenses indicates increases in economic output of between 2.5% and 4.5% over a period of 4 years that is 1993 – 1996.

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