Homemade Dividends

Homemade Dividends: What They Are and How They Work

Key takeaways

• Homemade dividends are cash generated by selling a portion of an investor’s own portfolio rather than receiving payouts from a company.
• They are central to the dividend irrelevance debate: if investors can create cash by selling shares, some argue corporate dividend policy matters less.
• Selling shares to create cash reduces the investor’s shareholding and future income potential, which is an important counterargument to the irrelevance view.

What are homemade dividends?

A homemade dividend is the cash an investor creates by selling part of their equity holdings. Unlike corporate dividends—cash distributed by a company’s board—homemade dividends come from the investor’s portfolio. The concept highlights that investors can generate liquidity on their own regardless of a company’s payout policy.

Dividend irrelevance theory

Economists Merton Miller and Franco Modigliani popularized the idea in the early 1960s that dividend policy is largely irrelevant to firm value in frictionless markets. The core argument: when a company pays a dividend, its stock price typically falls by the dividend amount on the ex-dividend date, leaving shareholders no better off overall. Because investors can sell shares to obtain cash, corporate dividend policy should not affect their wealth in theory.

Counterarguments note practical frictions: taxes, transaction costs, information asymmetry, and the fact that selling shares reduces future dividend potential and ownership stake, which can matter to many investors.

How traditional dividends work

Corporate dividends follow a simple timeline:
* Declaration date — the board announces the dividend.
* Record date — the company identifies shareholders eligible for the dividend.
* Ex-dividend date — typically two business days before the record date; buyers on or after this date are not entitled to the recently declared dividend.

Dividends may be regular (monthly or quarterly) or special (one-time distributions after unusually strong earnings or corporate restructuring).

Which companies pay dividends

• High-dividend sectors: utilities, energy (oil & gas), basic materials, financials, healthcare, and pharmaceuticals.
• Structures that commonly pay high distributions: REITs (real estate investment trusts) and MLPs (master limited partnerships), which often return most cash flow to investors.
• Low or no dividends: early-stage and high-growth companies, particularly technology firms, typically reinvest earnings into growth rather than paying shareholders.

Practical considerations

• Flexibility vs. permanence: Homemade dividends give investors flexibility to generate cash when needed, but reducing holdings decreases future income and ownership.
• Taxes and transaction costs: Selling shares can trigger capital gains taxes and brokerage fees, while some dividends have favorable tax treatment depending on jurisdiction—this affects the relative attractiveness of homemade versus corporate dividends.
• Investor preference: Some investors value predictable income (favoring dividend-paying stocks), while others prefer the control and timing of selling shares.

Conclusion

Homemade dividends illustrate that investors can create liquidity independent of a company’s payout policy, a fact that fuels debate over the economic significance of dividends. In practice, taxes, costs, and investor goals shape whether homemade dividends or corporate payouts are the preferable source of cash.