Homemade Dividends

  

Categories: Stocks

Your washing machine breaks down. You can fix it by ordering a replacement part from the manufacturer. Or you can jerry-rig something using paper clips, duct tape, and chewed up gum. Traditional vs. homemade.

A traditional dividend comes from a company. It represents a cash payment made for every share an investor holds. You have 1,000 shares in a firm. They declare a dividend of $0.25 a share. You get a check from the company of $250.

A homemade dividend is the duct tape version. Instead of getting a payment from a company, the investor sells a portion of their portfolio for cash. The two strategies don’t have a lot in common, really, except for generating cash.

Keep doing the homemade dividend thing and eventually you'll run out of assets. In the same way that, if you duct tape your washing machine enough, eventually you're going to end up flooding the kitchen.

With a traditional dividend, when you get that $250 check, you still have the 1,000 shares. The collection can go on pretty much indefinitely, as long as the company pays out dividends.

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Finance: What is a Dividend?1774 Views

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Finance a la shmoop what is a dividend? well let's start with how [Bird flying with a bag]

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dividends came to be well dividends are the result of a great and awesome quote

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problem unquote.. what happened to corporations is they grew and became

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dominant in their respective industries they retained so much cash profit even [man as a giant corporation crushing city buildings]

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after building factories digging mines and smelting whatever they smelted well

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that they couldn't figure out what to do with the cash so under a lot of [man with an open briefcase full of cash]

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shareholder pressure and that is the common shareholders would threaten to

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fire the Board of Directors, the fat and cash happy corporations just to begin to [common shareholders hitting the board of directors]

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give it back to shareholders their owners who were in turn made happy by

00:46

that event and in many cases on the announcement of an increased dividend [share prices increasing and man shouts into a speaker]

00:50

policy share prices went up because of that whole investor happiness thing

00:54

there's a good structural reason for dividends to exist however they force [men bricklaying]

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companies to be disciplined in their spending that is if companies aren't

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disciplined, they don't have the money to pay the dividend and well when that

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happens to a company basically everyone gets fired in most public companies [Donald Trump firing an employee]

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dividends are viewed as a long-term commitment not as like a one-time thing

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in fact during the Great Depression AT&T famously continued paying its dividend

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without fail and many families relied on that dividend to make ends meet in the [family together eating dinner]

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modern era companies in financial stress have even borrowed money just to make

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sure they can pay their dividends to investors why well they believe that

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when they get through the tough times they'll return to that massive [man running down a road sign posted under tough times]

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profitability and they'll have a track record of continuing to pay dividends [oil machine working as cash piles up]

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and that love is worth taking out a loan to pay a dividend the other big thing to

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consider is that dividends are a very meaningful part of investment returns [dividends arrow pointing to investment returns]

01:50

which lousy financial journalists so often seem to forget many will decry the

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era of the 70s as a lost decade looks like the stock market went nowhere from [man fumbling through a skip]

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1968 to about 1980 right? well no it didn't go up but during that

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period company's continued to pay their dividends and for the decade the [money going into a shareholders window]

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dividend rate of the average S&P 500 company was about six percent so if

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you've done nothing other than collect your six percent a year in dividends [Man collecting a 6% dividends]

02:20

well you would have been just fine you would have almost doubled your

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investment money this way ignoring taxes from about nineteen sixty eight to [Man doubling his investment money from 1968-1980]

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nineteen eighty and that's not bad for a lost decade

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