Synthetic Dividend

AAA

DEFINITION of 'Synthetic Dividend'

A type of incoming cash flow that an investor creates with certain financial securities to produce a dividend-like payment stream that resembles the periodic cash receipts from a dividend-paying stock.

INVESTOPEDIA EXPLAINS 'Synthetic Dividend'

For example, suppose an investor owns shares in a company that does not pay a quarterly dividend. In order to create a cash-flow stream from the shares, the investor could write covered call options on the underlying stock. By doing so, he or she would receive the option premiums as an incoming cash flow, but would be obligated to sell the shares to the option-buyer should that person choose to exercise the options.

This situation, while limiting the potential price appreciation the investor can realize from his or her own shares, creates a dividend-like cash flow stream.

RELATED TERMS
  1. Call Option

    An agreement that gives an investor the right (but not the obligation) ...
  2. Portfolio Income

    Income from investments, dividends, interest, royalties and capital ...
  3. Dividend

    1. A distribution of a portion of a company's earnings, decided ...
  4. Dividend Policy

    The policy a company uses to decide how much it will pay out ...
  5. Homemade Dividends

    A form of investment income that comes from the sale of a portion ...
  6. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
Related Articles
  1. Reducing Risk With Options
    Options & Futures

    Reducing Risk With Options

  2. How Dividends Work For Investors
    Investing Basics

    How Dividends Work For Investors

  3. The 4 Advantages of Options
    Options & Futures

    The 4 Advantages of Options

  4. How Warren Buffett made Berkshire Hathaway ...
    Stock Analysis

    How Warren Buffett made Berkshire Hathaway ...

comments powered by Disqus
Hot Definitions
  1. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another ...
  2. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will ...
  3. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  4. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  5. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  6. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
Trading Center