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A special dividend announcement in my inbox reminded me it’s that time of year: special dividends season.

For certain types of stocks and funds, special dividends point to a high probability of future dividend increases. That’s a big help in a year when falling share prices made us wonder about the stability of our investment choices.

Here are a few special dividends I’m looking at that you still have time to get in on…

Last week, hotel real estate investment trust Apple Hospitality REIT (APLE) announced its regular $0.08 monthly dividend and a special cash distribution of $0.08 per share. The combined $0.16 per share dividend will be paid on January 17, and the ex-dividend will occur on December 29.

The special dividend indicates that APLE will likely return to the $0.10 monthly dividend the REIT paid before the pandemic-triggered economic shutdown.

As a real estate exchange trust (REIT), Apple Hospitality must pay out at least 90% of its net income as dividends. If a REIT has not paid at least 90% as the end of the year approaches, it can pay a special dividend can be paid to meet the legal requirements.

REITs and business development companies (BDCs) operate under the 90% payout rule. If you see one of these companies announce a special dividend payment between now and the end of the year, take a look at the stock. There may be a regular dividend increase coming soon.

Year-end special dividends also show if a company performed better than expectations. If you see a special dividend on a stock that has dropped this year, the stock price is wrong, and the business is doing well.

Investment funds, including mutual funds, closed-end funds (CEFs), and exchange-traded funds (ETFs), must pay out 100% of the net income and realized capital gains the fund received during the year. Many CEFs and ETFs employ a managed dividend policy, in which they pay level dividends based on the expected income for the year.

When a fund with a managed dividend policy earns more than the dividends paid, the fund must pay out any earnings above the dividends paid for the year by the end of the year, in the form of a special dividend.

The InfraCap MLP ETF (AMZA) provides a good example. This ETF owns an actively managed portfolio of master limited partnerships (MLPs) that provide energy midstream services. AMZA has paid a $0.22 per share monthly dividend for the last two years. MLPs have been aggressively increasing dividend rates this year—a big contrast to 2021, when dividends paid in the sector was relatively flat—so I will not be surprised if AMZA announces a special year-end dividend. And if it does, you can count on an increase in the monthly rate for next year.

To recap, when you see a pass-through business, a REIT or BDC, or an ETF announce a special year-end dividend, take a deeper look at the fundamentals. You may have found an excellent dividend growth investment.

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