Homemade Dividends

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.