Synthetic Dividend

Think of it like powdered milk. Not exactly what you dream about when your grandma sends you a care package of cookies. But it works okay if the real stuff isn't around.

Dividends are cash payments companies make to stockholders. You own 100 shares of a firm that issues a quarterly dividend of $1 a share. Every three months, you get a check for $100. It's income generated just by holding a stock. Many stocks don't pay dividends. If a company believes it can create more value by reinvesting funds in it's business, it will keep the cash itself instead of sending checks to its shareholders. However, if you own these stocks, there are still ways to generate income from the shares. They aren't dividends, really. But, like dividends, they represent income you get from the shares you hold.

The most common way to create synthetic dividends is using covered call options. A call provides the holder the right, but not the obligation, to buy a stock at a certain price during a certain time frame. With this form of synthetic dividend, you sell this right to someone else. You receive a premium from the contract...income from your shares.

The potential downside comes if the person chooses to exercise their option. Now you have to sell the shares at the prearranged price, which might be below the current market price for the stock.