What Are Homemade Dividends and Why Would Investors Make Them?

Article Updated: 24.07.2025

/ Author:

CEO BeatMarket

/ Reviewed by:

Serhio MaxDividends

Homemade dividends are the investment income that investors receive by selling a portion of their equity portfolio. This concept stems from the Modigliani-Miller theorem.
Such an approach to portfolio management provides investor control over cash flow generation. The outcome is financial flexibility and a complete lack of dependence on the company’s dividend policy.
Homemade dividends are not considered passive income like traditional dividends. The investor is required to take action and the asset base decreases as a result.

In this article, we will discuss ‘what are homemade dividends and why would investors make them?’

Table of Contents

Understanding Homemade Dividends

Homemade dividends definition: This is investor-generated income from stock sale that is intended to generate cash inflows.

The idea of generating cash flow by regularly selling part of an investment portfolio is based on the dividend irrelevance theory. This theory questions the real value of traditional dividends. According to this theory, on the ex date, the stock price falls by the amount of the dividend. Therefore, it makes no difference when the investor sells the equity holdings.

Supporters of financial self-determination place a high value on homemade dividends. This strategy enables shareholders to become independent of factors such as the company’s current profits and the specifics of its dividend policy.

Quick fact: It is convenient to combine organizing homemade dividends with portfolio adjustment. Investors can sell stock holdings that have grown the most in value. This approach enables them to simultaneously support the necessary asset allocation and ensure cash inflows.

The Modigliani-Miller Theorem and Dividend Irrelevance Theory

The Modigliani-Miller theorem forms the basis for the theoretical framework of homemade dividends. This was formulated in 1958. It is asserted by the theorem that a firm’s valuation by the market is not influenced by its capital structure. Franco Modigliani and Merton Miller later developed this idea further, introducing the dividend irrelevance theory. According to this theory, a firm valuation and cost of capital are unaffected by its dividend policy.

This assertion only holds true in a perfect capital market. In reality, however, transaction costs, brokerage costs, taxes and other factors render it unsuitable for use in corporate finance theory.

Another aspect is market efficiency. Investor behaviour is not always rational. People believe that traditional dividends offer substantial value. Consequently, they are willing to pay more for shares that offer them.

H2: How Homemade Dividends Work in Practice

An investment strategy that allows you to mine homemade dividends involves the stock sale according to a specific schedule or as needed. The evaluation of the subsequent elements is vital for investor decision-making during portfolio rebalancing for cash generation:

The importance of maintaining an asset allocation that aligns with the investor’s risk profile.
Tax liabilities arising from share liquidation.
The inevitable equity reduction.

Proponents of homemade dividends refer to this strategy as providing timing flexibility and simplifying cash flow management. However, strong portfolio management skills are required.

H2: When Homemade Dividends Are Beneficial

It is advisable to generate homemade dividends when:

The investor’s aim is to achieve portfolio diversification by working with growth companies and non-dividend paying stocks.
Self-employed investors have an irregular income from their work, as well as fluctuating cash flow needs relating to their investments.
Prices are near market highs, which presents opportunities for profit realization.
The strategy involves high investment flexibility and market timing, i.e. identifying the optimal times to buy and sell.

Homemade Dividends vs Traditional Dividends

A common question is, ‘What are homemade dividends, and why do investors seek to receive them?’ To better understand the answer, let’s compare traditional and homemade dividends based on three key parameters.

Traditional dividends are regular payments, the frequency of which is set out in the dividend policy. Most companies distribute quarterly dividends. In rare cases, additional special dividends may also be paid.

The board of directors issues the dividend amount and approves the key dates:

declaration date – the day on which the amount of the upcoming payment is revealed;
record date and ex-dividend date – the day on which the company compiles the list of dividend recipients. Purchasing shares after this date will not entitle the buyer to the upcoming dividend;
payment date – the day on which funds are actually transferred from the company’s accounts.

Homemade dividends signify the ability to receive cash at any time and in any amount required. So, they are a good option if an investor seeks more control.

An important difference is that traditional dividends provide automatic income. To receive them, you simply need to be a shareholder on the record date set by the company’s board of directors. In contrast, to obtain homemade dividends, an investor must execute a transaction.

A third fundamental difference is that traditional dividends do not result in a share reduction in an investor’s account. A weakness of the homemade dividend theory is the risk of asset base depletion.

Advantages of Homemade Dividends

The advantages of the strategy include:

total investor control and cash flow optimization;
timing flexibility and the option to take advantage of market timing benefits, as well as the ability to control the capital gains timing;
benefits from effective tax management;
broader investment options and portfolio customization through growth companies without compromising on receiving cash flow.

H2: Limitations and Challenges of Homemade Dividends

The following disadvantages are pointed out by critics of the dividend irrelevance theory:

transaction costs and brokerage fees;
asset base reduction;
portfolio management complexity and high professional oversight requirements;
timing risk and market volatility.

Critics argue that the main drawback of generating cash flow from sales is that investors may have to sell shares during bear markets. This could leave them with a depleted asset base.

Another frequently mentioned disadvantage is the requirement to pay capital gains tax on profits generated from the sales. However, traditional dividends are also taxable income and, in some cases, the tax rate may be higher.

Impact on Portfolio Management and Investment Strategy

Investment planning should include provisions for portfolio rebalancing to generate the necessary cash flow.

Homemade dividends have a risk management and a diversification impact. They reduce the size of an investor’s portfolio, making it more difficult to achieve optimal asset allocation.

A long-term strategy and cash flow planning based on regular partial sales of shares increase market monitoring requirements. Investors must consider not only fundamental indicators, but also current market conditions.

Tax Considerations and Implications

The capital gains tax rate depends on how long you have owned the asset. Dividend tax rates depend on whether the payout is recognized as a ‘qualified dividend’. Both taxes are also influenced by the investor’s income.

The objective of tax planning is to enhance tax efficiency. Investment tax optimization is achieved through preferential tax treatment. In order for the income from the sale of an asset to be taxed at long-term capital gains tax rates, it is necessary to hold the asset for more than one year. Otherwise, it will be subject to ordinary income rates.

Investors can apply tax timing strategies. For example, they can reduce their tax rate by selling shares in a year when their income from other sources is lowest.

Real-World Applications and Examples

To help you better understand homemade dividends, we will provide practical examples of investment scenarios for a homemade dividend portfolio implementation.

The first scenario involves growth stock investing. In this scenario, the investor benefits from cash flow management. At the same time, their capital increases at a faster rate than would be possible with traditional dividend-paying stocks.

Retirement planning calculators can help you determine how much of your assets you can sell without risking the premature depletion of your capital.

The second situation in which homemade dividends become relevant is under certain market conditions, such as periods of low interest rates and bull markets.

The Bottom Line

The main conclusion on homemade dividends is that such a portfolio strategy provides investment flexibility. It also allows for better meeting individual investor needs.

However, the key factor hindering its widespread implementation is the need for professional guidance on portfolio management. Effective financial planning of dividend alternatives requires investment education and time spent analyzing the market.

FAQ

What is an example of a homemade dividend?

For example, an investor may have capital invested in growth stocks. They sell assets worth 1% of the portfolio’s value once a quarter. This ensures a stable cash flow. This flow is maintained through growth in the price of the remaining stocks.

How to make $1,000 a month in dividends?

According to the 4% rule, if the investor’s goal is to sell stocks worth $1,000 each month, they need a capital of $300,000.

How much money do you need to make $50,000 a year off dividends?

When it comes to homemade dividends and following the 4% rule, the required capital is $1.25 million.