Business, Legal & Accounting Glossary
Synthetic dividend refers to a strategy whereby an investor creates cash flow using assets that otherwise may not have paid a dividend. The most common technique an investor can use to generate a synthetic dividend is selling covered call options on a security they hold.
This synthetic dividend strategy works like this: suppose an investor held a stock with good long-term potential for appreciation but wanted to generate some income. The investor could create a synthetic dividend by selling a call option against the security. The investor would essentially be selling the right to purchase shares of that security at a given price until the option expired. The proceeds from the sale of the option would be the investor’s synthetic dividend.
This strategy works to generate a synthetic dividend but investors need to be aware of the risk of losing securities in their portfolio against which they sell the options.
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This glossary post was last updated: 6th February, 2020 | 0 Views.