Synthetic Dividend

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.

BREAKING DOWN '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. Cash Flow

    The net amount of cash and cash-equivalents moving into and out ...
  2. Cash Flow From Financing Activities

    A category in the cash flow statement that accounts for external ...
  3. Cash Flow Per Share

    A measure of a firm's financial strength, calculated as: Cash ...
  4. Non-Operating Cash Flows

    Cash flows (inflows and outflows) that are not related to the ...
  5. Synthetic

    A financial instrument that is created artificially by simulating ...
  6. Cash Value Added - CVA

    A measure of the amount of cash generated by a company through ...
Related Articles
  1. Investing

    Analyze Cash Flow The Easy Way

    Find out how to analyze the way a company spends its money to determine whether there will be any money left for investors.
  2. Investing

    Cash Flow From Investing

    Cash flow analysis is a critical process for both companies and investors. Find out what you need to know about it.
  3. Managing Wealth

    Cash Flow Is King: How to Keep it Running

    Why is cash flow so important, and what steps can a business take to improve it?
  4. Investing

    Operating Cash Flow: Better Than Net Income?

    Differences between accrual accounting and cash flows show why net income is easier to manipulate.
  5. Investing

    Analyze Cash Flow The Easy Way

    Cash flow statements reveal how a company spends its money and where that money comes from.
  6. Trading

    Understanding Cash Flow

    Learn about the different types of cash flows and the importance for businesses to properly manage their cash flows.
  7. Investing

    Fundamental Case Study: Is Amazon's Cash Flow Actually Solid? (AMZN)

    Review Amazon's cash flow situation, including its free cash flow yield, operating cash flow from organic growth and cash flow from debt financing.
  8. Investing

    Picking Retirement Stocks: Dividends vs. Free Cash Flow

    Instead of focusing on dividend payments, a better metric for choosing stocks for your retirement portfolio could be a company’s free cash flow (FCF).
  9. Trading

    Free Cash Flow Yield: A Fundamental Indicator

    Free cash flow can measure a business’s performance as if you’re looking at its net income line.
  10. Investing

    Cash Flow Statement and Financial Health

    A cash flow statement records the amounts of cash and cash equivalents entering and leaving a company.
RELATED FAQS
  1. What's the difference between free cash flow and operating cash flow?

    Learn the difference between free cash flow and operating cash flow. Explore how analysts use earnings and cash flow when ... Read Answer >>
  2. Where exactly do dividends come from?

    Learn about sources of cash dividend, such as operational, financing and investing cash flows, as well as issuances of new ... Read Answer >>
  3. What is the direct method of calculating cash flow from operating activities?

    Learn how a company prepares its cash flow from operating activities using the indirect method, and understand the difference ... Read Answer >>
  4. How is cash flow from operating activities calculated?

    Discover why cash flow from operating activities is significant to businesses, and learn the direct and indirect methods ... Read Answer >>
  5. Are taxes calculated in operating cash flow?

    Learn how taxes are involved with the calculations for operating cash flow, and find out about the importance of operational ... Read Answer >>
  6. What is the difference between cash flow and free cash flow?

    Learn about the main differences between cash flow and free cash flow. In addition to the differences, learn how to calculate ... Read Answer >>
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center