A patent is a dividend-paying asset: reading patents through licensing

In the previous piece I said patents are "assets with a maturity." Today's story is about the "cash" that asset produces every year.

I often compare the cash flow a patent produces while you hold it to a stock's "dividend." Read patents in the language of dividends and it becomes clear why patents are attractive income assets.

1What is a dividend? Cash flow you receive "without selling"

There are two ways to make money from a stock.

• A "capital gain" from buying low and selling high
• A "dividend," as the company shares its profit while you hold it

The key to a dividend is that cash comes in "without selling." You keep the stock and receive cash flow every year. That is why dividend stocks are called "income assets."

2Licensing = a patent's dividend

Patents have the same two options.

• "Assignment (sale)," selling the patent outright
• "Licensing," keeping the patent, letting others use it and collecting royalties

3High-yield patents vs low-yield patents

Just as stocks come in high-dividend and low-dividend varieties, patents have a "dividend yield" too.

• High-yield patents → core technologies and standard-essential patents the market needs. Many companies must pay royalties to use them, so the cash flow is large. (Examples: telecom standard-essential patents, blockbuster drug patents)
• Low-yield (no-dividend) patents → patents that are rarely used or held only "defensively." They bring in almost no royalties.

4Ex-dividend drop: stocks have it, patents (almost) don't

This is the decisive point where patents beat stocks.

• A stock's ex-dividend drop → once the right to the dividend is fixed, the share price falls by roughly that amount (going ex-dividend). In other words, a dividend is ultimately money "leaving the value of your shares." Your asset shrinks by what you receive.
• A patent's licensing → even when you collect royalties, the value of the patent right itself does not shrink by that amount. There is (almost) no ex-dividend drop.

Why? Because a patent is a "non-rival" good. When someone else uses my patent, my patent does not wear out. I collect royalties and the underlying asset (the right) stays fully intact.

5From several places at once: "multiple dividends"

This is where the real strength of patents shows.

A share of stock pays only one dividend. A single patent, however, can be licensed to Company A, Company B and Company C "at the same time" (non-exclusive licenses). Because it is non-rival, it can be handed out to several parties in parallel.

• Real estate: one space, one tenant → a single stream of rent
• Patents: one right, many licensees → multiple streams of royalties

6So how to manage a patent as a "dividend asset"

• Look at dividend yield: check whether the patent actually produces royalties, or whether it is a "no-dividend stock."
• Design multiple licenses: rather than tying it up exclusively, granting non-exclusive licenses to several parties adds dividend sources.
• Use the absence of an ex-dividend drop: you can keep drawing cash flow while retaining the right.
• But remember the maturity: these dividends also last only until the 20-year term ends (see the earlier "Maturity" piece). Collect as much as you can while they flow.

Closing: without selling, without wearing out, from many places

A patent is a "dividend-paying asset." You collect royalties while holding it without selling (income), the right does not shrink when you do (no ex-dividend drop), and you can license it to several parties at once (multiple dividends).

All of these dividends flow, however, only while the "right" is strong. If the patent is invalidated or designed around, the dividends stop that day. That is why designing the dividends is my job (finance), and protecting the right so they keep flowing is the job of attorney Yoo Yeon (law).

"A stock's dividend shrinks the stock by what you receive. A patent's dividend does not shrink the patent, and it can come from several places at once."