Definition of Homemade Dividends
Home made dividends are nothing but the type of investment income, or the proceeds of sale which the shareholder gets from the sale of part of his investment portfolio, i.e. the homemade dividends are the part of investment income of the shareholders that differs from other types of traditional dividends the shareholder gets from the company in which the board of directors of the company or the management has to approve the dividend distribution.
Explanation
The shareholder of the company sells some part of his investment to increase the cash inflow. There can be different objectives the person can have, and hence in order to fulfill those objectives of cash flow, the shareholder sales the part of his investment and the proceeds he gets from this sale of investment is called as homemade dividends.
Features of Homemade Dividend
Features of Homemade dividend are:
- Unlike the other forms of dividends in which the company distributes the amount of profit to the shareholders, in homemade dividends, the amount of profit does not belong to the company, but it is the part of a sale of investment portfolio by the shareholder himself.
- No Dividend policy is required in homemade dividends as the homemade dividends are decided by the investor himself, unlike the dividend policies followed and issued by the company.
- In homemade dividends, there is no obligation that the investor has to follow a particular pattern. It is completely at the investor’s discretion that how much homemade dividend he can make by selling some portion of his investment.
Examples of Homemade Dividends
Let us take the example of company XYZ Ltd. XYZ ltd declares the dividend at some specific percentage.
Peter holds 1,000 shares of XYZ Ltd at $40 per share. XYZ Ltd paid a dividend of $2.5 per share. Peter was hoping to get a dividend of $3,500 with the rate of $3.5 dividend per share. However, as the rate of dividend declared by XYZ Ltd is less than the expectations of peter, he is disappointed with the cash inflows in the form of dividends by the company. The company declared that the share price will fall to $25 per share after the date of ex-dividend. Hence, Peter waits until the ex-dividend date, and the price of the share price gets reduced, i.e. @25 per share.
Solution:
After the ex-dividend, Peter sells 40 shares of the company at the reduced price of $25.
Homemade Dividend is calculated as:
Homemade Dividend = Number of Shares Sold * Price per Share
- Homemade Dividend = 40 * $25
- Homemade Dividend = $100
|
Particular |
Value |
| No. of shares held by Peter (A) | 1000 |
| Share Price per share (B) | $40 |
| Dividend paid by the company per share (C) | $2.50 |
| Normal Dividend (D) = (C) *(A) | $2,500 |
| Peter’s expected dividend per share (E) | $3.50 |
| Peter’s expected cash inflows (F) | $3,500 |
| No.of shares sold by peter (G) | 40 |
| Price per share (H) | $25 |
| Homemade dividend earned by peter (I) = (G) *(H) | $1,000 |
Benefits of Home Made Dividends
Some of the benefits are given below:
- The shareholder can get the homemade dividend at any time at his discretion. He need not to wait for the declaration and receipt of the dividend by the company.
- The cash inflow of the investor increases. Hence, he can undergo the planned activities and usage of homemade dividends for his personal or business purpose or any future purpose without any complexity.
- Also, he is under no control of selling a particular amount of shares or earning any particular amount of homemade dividend. He owns the shares, and hence it is completely his will what he makes from his shares and how much homemade dividend he gets.
Challenges of Home Made Dividend Policy
The following are the challenges of homemade dividend policy:
- The sale of a fractional number of shares is not allowed. If the shareholder wants only a few amounts which he can get by the sale of 0.5 shares. He can’t sell the fractional number. He has to make the sale of 1 share in which case he has to sell extra 0.5 shares. By this, the number of shares will not remain to the shareholders for the future.
- The shareholder cannot sell the share directly in the market. He has to make the sell-through broker, in which case he has to bear brokerage expenses too. Hence, the dividend he was expecting through the sale of shares will be reduced by incurring brokerage expenses.
- The traditional dividends we get from the company generally have the less amount of taxes imposed on them. However, the taxes imposed on homemade dividends are more than the taxes involved on the traditional dividends because the homemade dividends are called the personal earnings of the shareholder.
- The homemade dividends are earned by the sale of investments by the shareholder. Hence the investment of the shareholder gets reduced. The return the shareholder was expecting from such investment gets lost, and the shareholder faces the loss on the return in future.
Conclusion – Homemade Dividends
A homemade dividend is one of the important and popular forms of generation of income by the sale of the part of the shareholder’s investment portfolio. Homemade dividends are earned, or the sale of part of the investment is made to meet the expectation of shareholders regarding cash inflows in case the company is unable to pay the desired dividend by a shareholder or meet the shareholder’s expectation. Sometimes, the homemade dividends prove to be beneficial for the shareholder as he can generate the income by the sale of investment at any time he wants. He can meet his cash inflow plans anytime. However, considering the cost of sale of investments like brokerage cost, earning of homemade dividends results in the extra cost with less income. Also, the number of shares decreases for the future, again affecting the returned income for the future period. Considering all the above points, the shareholder should decide to earn homemade dividends by the sale of part of his investments.
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