The Safest, Most Profitable Form of Investing You've Never Heard of

The damage to Steve Wynn's bank account was mended much quicker than the hole he poked in the center of Pablo Picasso's "La Reve"...

While showing the coveted Picasso to his friends, the billionaire casino mogul accidentally stuck his elbow into the canvas last October. The painting was due to be sold for $139 million in a few days... the largest amount ever paid for a piece of art. Instead of cashing in, Wynn paid $85,000 to have the painting repaired and now intends to keep it.

Even if Wynn had chucked "La Reve" into the fireplace, his wealth wouldn't have changed a whole lot last winter. His company, Wynn Resorts (WYNN), soon issued one of largest dividend payments in market history: In a one-time payout, the company distributed to shareholders more than $600 million on December 4. As the owner of 24.5 million shares, Wynn eased his pain with nearly 25% of that dividend, about $147 million. 

When Wynn Resorts announced the payment on November 13, shares quickly jumped from $82.19 to $85.80. When the dividend was paid, WYNN stock dropped from $94.13 to $89.59. Since then, the stock price has more than recovered to its pre-dividend level, reaching $114 two months later for a quick 32% gain.

In other words, Steve Wynnruined his Picasso, had $8 million to spare, and then made 32% in capital gains. That's the power of the special dividend... one of the safest, most profitable forms of investing you've never heard of. 
 
So why would a company return such a huge amount of cash to shareholders? As with many one-time dividend payouts, the company's problem was simple... it had way too much cash. Its enormous cash flow, plus $900 million from the sale of development rights inMacau, had left the company with a ton of money it couldn't use.

I've studied every special-dividend payout issued over the past five years. In almost every situation, investors get excited about the big dividend and chase the price higher. After the payout, the stock falls – usually around the amount of the dividend.

But what's important for investors is that the stock steadily climbs back to its original level.

Of course, after a big chunk of cash leaves the company, the market cap will decrease in step. But most companies are valued on earnings... and as long as special-dividend payers maintain their income and bring cash into the business, they almost always return to their original stock price... providing nearly risk-free gains for folks who buy after the dividend issued.

Consider Imperial Sugar (IPSU), which paid out a $3 dividend on January 5, 2007. On December 14, we recommended our readers buy shares to pocket the big dividend. Within 18 days, the share price exceeded the pre-dividend price and then climbed another 25%.

Don't worry if you've never read about investing in special-dividend stocks in the mainstream press. The best opportunities are never on the front page.

You can easily track what's going on with special-dividend payers with the "Money & Investing" section of the Wall Street Journal... and there's never been a better time to do so. Standard & Poor's announced yesterday that 2007 will be a record year for dividends, estimating S&P 500 companies will pay out a record $252 billion.