homemade dividend


Investment dividend created by a stockholder, as opposed to a dividend received from the company that issued the stock. This is how it works: assume that a stockholder owns 1,000 shares of a $100 stock (total value $100,000) that does not declare a dividend. The stockholder can sell 10 shares at the par value to receive $1,000 in cash equal to 1% dividend over his or her total stockholding of $100,000. If there is no capital gains liability, the stockholder gets to keep the full $1,000. This is the homemade dividend. It is true that now his or her stockholding is worth only $99,000, but that would have been the same if the stock issuer had declared 1% dividend thus bringing down the stock price by the same factor.
Moreover, dividend income being taxable, his or her after-tax net receipt would have been around $700 instead of $1,000. Additionally, the stockholder can put the homemade dividend in a deposit account to receive interest income practically forever.
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