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Companies Shelling Out Billions to Beat the 'Fiscal Cliff'

Companies are racing the clock to hand out billions in special dividends before year end—and some of them are taking on debt to do it.

The latest is Costco, which announced a $7-a-share payout to stockholders Wednesday and is issuing bonds to pay for the $3 billion dividend. (Read More: Costco to Pay Special Dividend)

Fearing a tripling of dividend tax rates next year, companies have found one-time payouts and early payments of quarterly dividends as a way to beat some of the impact of the "Fiscal Cliff."

Taking advantage of super-low interest rates, companies have been issuing debt at a record rate this month. Some say they plan to use the proceeds to fund dividends and share repurchases.

"I think what you're seeing is a reaction to the lack of clarity around the tax laws, and that's what Treasurers and CFOs are doing," said Joel Levington, managing director of corporate credit at Brookfield Investment Management.

Christopher Reich of Thomson Reuters IFR points out, for instance, that Murphy Oil in its prospectus Tuesday also said that it would use the proceeds of its more than $600 million offering of 5-year, 10-year and 30-year bonds to fund its previously announced special dividend, among other things.

He also noted that Disney mentioned dividends among the general corporate purposes it might fund with its debt deal this week.

On Tuesday, issuance for the month surpassed $100 billion, making it the busiest November ever and on track to possibly be the busiest month of 2012, according to IFR.

Companies are using debt to fund payouts for different reasons. "I think what you're seeing is there's largely a mismatch with significant cash balances that are overseas. Companies won't repatriate that money given the tax implications. While there is cash there it's not really useable for a dividend or share repurchase," he said.

At the same time, credit quality is peaking, says Levington. "What I mean is you're going to see companies use leverage in 2013, whether it's in the form of cash to fund dividends, or more likely for acquisitions and share repurchases. That will be a trend that you'll see throughout the year," he said.

In the case of Costco, S&P removed its investment-grade ratings from credit watch positive, as the company planned to offer $3.5 billion of senior unsecured notes, mainly to fund the dividend.

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The dividend tax rate, now 15 percent, is set to expire Dec. 31, and ahead of that investors have been dumping dividend paying stocks, like utilities. But they've also been eyeing a whole other group that are or could be paying special one-time dividends.

The concern is that the dividend tax rate could revert to 39.6 percent for the highest tax bracket if Bush tax cuts are not extended for the wealthy, as proposed by President Barack Obama.

The new Affordable Care Act—or Obamacare—also includes a new 3.8 percent tax on dividends and other investment income for wealthy taxpayers, and that would take the dividend tax rate up to 43.4 percent. At the same time, capital gains taxes, now 15 percent, could rise to their former rate of 20 percent.

"I think the dividend rate will go up, but not as much as the stance of Obama at the present time," said Wharton School finance professor Jeremy Siegel. "I don't think it will be all that much different, but it is going to be higher."

The special payouts, therefore, make sense.

"It's smart," Siegel said. "Just like people taking capital gains now. It's smart." (Read More: Even Muni Bonds May Be Targeted in 'Fiscal Cliff')

But the question is whether this mad dash by dozens of companies is ultimately good or bad for their performance. Siegel said it really does not matter, and CNBC's informal study of stock moves this quarter shows the same.

So far this quarter, about 70 companies in the Russell 3000 have announced special dividends, compared to approximately 44 Russell special dividend declarations in all of 2011. Standard & Poor's says all told, 173 public companies announced special dividends in November, a one-month record.

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About half of those Russell 3000 companies that announced payouts saw their stocks, as of Tuesday, rise at least 1 percent or more from the day they announced the special dividend. However, a third of those companies' stocks are down more than 1 percent, and the rest are flattish.

A common thread among companies that are paying out dividends, like Wynn's, for instance, is a big holding by insiders, families or private equity.

"If there's big insider holdings, obviously they would communicate to the firm's management that they would be prefer a dividend early because it would be taxed more later on," said Siegel. "The management should be concerned about shareholders anyway."

Larry McDonald, chief policy strategist at Newedge, said there are some stocks that fit the profile for possible special dividend payouts, including Ebay, Dell, Oracle, Microsoft, Yahoo and Charles Schwab.

Speculation about a special dividend could keep a floor under those stocks in the event of a broader market decline.

Besides big insider ownership and lots of cash, McDonald says to look to more mature businesses.

"If you've got a business that's really growing, and you start doing this then not just the board, but shareholders could take action, so it has to be a mature profile. In a declining profile, you could even get some more motivation there," he said.

Investors hunting for quick trades in these stocks should be careful.

"Trading these at this point is very risky because I've been hearing about this and hedge funds were doing this type of work in September, even August," McDonald said. "The market is down since September and August, and people are definitely bidding some of these names up and I would say a lot is priced in," he said.

(Read More: Who Gets Hurt the Most If US Goes Off 'Fiscal Cliff'?)

McDonald said the stocks may get an immediate pop, once they announce a dividend.

That happened in the shares of Las Vegas Sands, up more than 5 percent Tuesday after announcing late Monday it would pay $2.75 per share, or $2.3 billion in special dividends to shareholders of record Dec. 10. Chairman Sheldon Adelson said the priority is returning capital to shareholders, and he is the biggest shareholder, with a 52 percent stake.

Other companies that announced special dividends this week include Brown Forman, Ethan Allen, Drew Industries, CNH and Insperity.

The other trade investors are making ahead of a pending dividend tax hike is the sale of dividend paying stocks. But McDonald said that trade may reverse, as the Fed's next meeting approaches, and it is likely the Fed will beef up its quantitative easing program by extending asset purchases to include the Treasurys it was buying in Operation Twist. Operation Twist expires at the end of the year, and the Fed had been selling shorter duration securities as it bought longer dated Treasurys.

"You could get a situation where QE comes in, and people rush back to dividends again," McDonald said.

Follow Patti Domm on Twitter: @pattidomm

Questions? Comments? Email us at marketinsider@cnbc.com

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