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.
I'm wondering if there is too much buried in the "all else equal" part of the homemade dividend argument? The PGN example is about as close to "all else equal" as we can get. DUK/PGN can keep the dividend yield or cut it. But, "all else" is rarely "equal."
ReplyDeleteIsn't there evidence that high dividend stocks are less volatile than zero dividend stocks? Wouldn't a rational PGN shareholder prefer a lower volatile stock vs. higher volatility (all else being equal, of course)?
If an investor is diversified, then individual stock volatility shouldn't matter. If the stock has more market risk, then it should earn a higher return. Again, I think the issue with PGN is that a lot of PGN retirees are not diversified.
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