Understanding Homemade Dividends

Introduction to Dividends

• Dividends: Payments made by a company to its shareholders, usually in the form of cash or additional stock.
• Stock Price Adjustment: When dividends are paid, the stock price is adjusted down by the dividend amount.

Example of Dividend Payment

• Initial Stock Price: $100
• Dividend Payment: $2
• Adjusted Stock Price After Dividend: $98
  • Automatic adjustment occurs after the dividend payment.
  • Market trading resumes next day affecting the stock price naturally.

Shareholder Scenario with Dividend Payment

• Before Dividend Payment:
  • 100 shares owned
  • Stock price: $100 per share
  • Total Net Worth: $10,000
• After Dividend Payment:
  • Stock price: $98 per share
  • Cash received as dividend: $2 per share
  • Total Assets: $9,800 in stocks + $200 in cash = $10,000

Concept of Homemade Dividends

• Preference: Some shareholders prefer companies that do not pay dividends but still want periodic cash.
• Homemade Dividend Creation: Selling shares to receive cash instead of receiving company dividends.

Example of Homemade Dividend

• Before Homemade Dividend:
  • 100 shares owned
  • Stock price: $100 per share
  • Total Net Worth: $10,000
• Homemade Dividend Action:
  • Sell 2 shares at $100 per share
  • Receive $200 cash
  • Remaining Shares: 98
• After Homemade Dividend:
  • Stock value remains at $100 per share due to no price adjustment
  • Total Assets: $9,800 in stocks + $200 in cash = $10,000

Comparison: Actual Dividend vs. Homemade Dividend

• Both result in:
  • $9,800 worth of stocks
  • $200 cash
• No stock price adjustment occurs in homemade dividends since no actual dividend is declared.

Conclusion

• Homemade dividends allow shareholders to achieve a similar financial outcome as receiving dividends from the company without affecting the stock price.
• Useful for investors in non-dividend-paying companies who need periodic cash.

Thank you for your attention. Bye now.