Explanation :The home made dividend theory is completely different from the dividend policy that a firm applies. If a firm has accumulated cash flows, it will return the value to shareholders in the form of a dividend, or it will repurchase its shares. In both cases, investors seek to maximize their stream of income. If the firm’s dividend policy does not create significant cash flows for the investor, he is reinvesting the amount in the firm’s stock or he sells off a portion of the stocks he owns to generate the cash flow he needs. In fact, the homemade dividend theory suggests that investors are indifferent to the firm’s dividend policy because by selling off a part of their shares, they can generate the required stream of income.
In a nutshell :
- Homemade dividends signify a category of investment income that results from the partial sale of an investor's portfolio.
- Homemade dividends are unlike the traditional dividends that a company’s board of directors issues to shareholders.
- The ability of investors to mine homemade dividends has triggered a debate as to whether traditional dividends offer substantial value.