Tuesday, May 17, 2011

Ken French talks about homemade dividends

Ken French explains the concept of homemade dividends.  The basic idea is that you should be indifferent (all else equal) between owning a stock with a 5% dividend yield and a stock with a 0% yield where you sell 5% of your holdings annually.

This is actually a very important concept, and one not well understood by many stockholders.  Case in point;  the recent concerns of some local shareholders of Progress Energy who have expressed concern about the dividend yield on Progress stock declining after its merger with Duke Energy.

Side note: any students who have taken MBA 521 know this well.