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. Dividend

    A distribution of a portion of a company's earnings, decided ...
  2. Portfolio Income

    Income from investments, dividends, interest, royalties and capital ...
  3. Homemade Dividends

    A form of investment income that comes from the sale of a portion ...
  4. Call Option

    An agreement that gives an investor the right (but not the obligation) ...
  5. Dividend Policy

    The policy a company uses to decide how much it will pay out ...
  6. Catastrophe Equity Put (CatEPut)

    Catastrophe equity puts are used to ensure that insurance companies ...
RELATED FAQS
  1. How do I find the information needed for input into the Dividend Discount Model (DDM)?

    Analysts and investors should utilize a company’s financial statements, stock information websites and any number of analysis ... Read Full Answer >>
  2. What options strategies are best suited for investing in the aerospace sector?

    The best options strategies for investing in the aerospace sector exploit the sector's volatility and propensity for big ... Read Full Answer >>
  3. What options strategies are best suited for investing in the Internet sector?

    The long straddle and long strangle options strategies enable investors to capitalize on the Internet sector's volatility. ... Read Full Answer >>
  4. How many attempts at the Series 7 exam are permitted?

    The National Association of Securities Dealers (NASD) has not placed any limits on the number of times you can attempt to ... Read Full Answer >>
  5. Why should a company buy back shares it feels are undervalued instead of redeeming ...

    Repurchase and redemption are associated with different classes of stock. Common shares can be bought back by the issuing ... Read Full Answer >>
  6. Where can I buy covered call ETFs (exchange-traded funds)?

    Covered calls can be traded through any major retail broker. Investors need to have their brokerage accounts approved for ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Reducing Risk With Options

    If you want to use leverage to your advantage, you must know how many contracts to buy.
  2. Investing Basics

    How Dividends Work For Investors

    Find out how a company can put its profits directly into your hands.
  3. Options & Futures

    The 4 Advantages of Options

    Flexible and cost efficient, options are more popular than ever. Find out why.
  4. Fundamental Analysis

    Explaining the Geometric Mean

    The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment or portfolio.
  5. Options & Futures

    Why Is Best Buy Stock So Volatile?

    We look at why BBY has been so volatile in the past and whether this trend is likely to continue or abate in the future.
  6. Economics

    Where To Search For Yield Today

    It’s hard to miss that there has been a pronounced slowdown in the U.S. economy this year.
  7. Investing Basics

    What is a Record Date?

    The date established by an issuer of a security for the purpose of determining the holders who are entitled to receive a dividend or distribution.
  8. Investing Basics

    What is a Stock Option?

    An employee stock option is a right given to an employee to buy a certain number of company stock shares at a certain time and price in the future.
  9. Options & Futures

    Circumvent Limitations of Black-Scholes Model

    Mathematical or quantitative model-based trading continues to gain momentum, despite major failures like the financial crisis of 2008-09, which was attributed to the flawed use of trading models. ...
  10. Retirement

    Don't Make These Top 10 Mistakes On Your Roth IRA

    Don't lose out on the benefits of a Roth by contributing too much, breaking rollover rules or making other avoidable errors.

You May Also Like

Hot Definitions
  1. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  2. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  3. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  4. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  5. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
  6. Tangible Net Worth

    A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, ...
Trading Center