Homemade dividend

Homemade dividend

Sale of some shares of stock to get cash in an amount similar to that of a cash dividend.

Homemade Dividend

When one owns a stock, the sale of some of the shares to imitate a dividend. One creates a homemade dividend especially when the company represented in the stock does not declare a dividend for a particular period of time. Importantly, a homemade dividend is subject to, at worst, capital gains tax; if the shares are sold at a loss, there may be not taxation at all. This contrasts with a "normal" dividend, which is usually taxed at a higher rate that capital gains.
References in periodicals archive ?
Under the assumptions of Merton Miller and Franco Modigliani, for example, investors can always reinvest unwanted dividends, or sell shares to create homemade dividends, and thereby insulate their preferred consumption stream from corporate dividend policies.
Most obviously, the popular advice to "consume income, not principal" suggests a potentially widespread mental accounting practice in which investors do not view dividends and capital gains as fungible, as in the homemade dividends story and traditional theories of consumption, but rather place them into different mental accounts from which they have different propensities to consume.
Borrowing constraints are irrelevant in this setting, because the substitution of dividends for capital gains has no overall wealth effect, and homemade dividends can be created by selling shares.
The substitution of dividends for capital gains has no overall wealth effects, and homemade dividends can always be created by buying and selling shares.
The transaction costs of making homemade dividends are a more relevant factor a priori.