Over the past few years, dividend investing has gained steam, and many investors now have dividends as a condition at the top of their checklists. While many have done this because it feels good to receive a dividend payment, there are others who have taken this approach, because they realize that a dividend payment translates to the sharing of profits.
Some investors are unwilling to purchase a stock that does not pay regular streams of income. This is a category filled by many who are either retired or who are on the verge of taking the plunge into retirement. Although it is completely understandable that investors living off the income provided by their investments want to achieve higher dividends, they need to realize that dividends can be “homemade.”
Assuming an investor with $100,000 is able to invest in 10 dividend-paying stocks and receives an average dividend yield of 4%, the annual income would total $4,000. Taking the same $100,000 and excluding the dividends would translate to investors needing to come up with a return of $4,000 on an annual basis.
There are a few ways to do this.
First, it is important to realize that when a company pays a dividend, it is money that is paid out, whereas had the dividend not been paid, the equity held inside the company would have increased by that same amount. Essentially, the share price would increase in value by a slightly higher amount. The result of this is that investors would hold shares that would be priced just a little higher and would have the opportunity to sell those shares to create the $4,000 of income.
The second and riskier approach would be to write call options against the shares currently owned. This is referred to as covered call writing, which is much more daunting but can generate substantial income throughout the year. The caveat is that the upside for shares which are owned is limited. However, the investor will have to bear the downside.
For investors considering investments in companies that do not pay dividends, there’s BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) and Bombardier, Inc. (TSX:BBD.B). Both companies are well known in their respective industries and do not pay dividends; instead, investors will receive the entirety of the return from the capital appreciation when shares rise in value. For investors looking for higher-growth opportunities and still some income, there is still the opportunity to buy either of these names.
Taking shares of BlackBerry as an example, $10,000 can buy approximately 770 shares, which, at current prices, would mean an investor would have to sell approximately 77 shares to raise $1,000. For the gap in income that the remaining nine stocks fail to provide, the difference can easily be made up. Hence the term homemade dividend.
