The Stock as a Portfolio of Durations: Solving Black’s Dividend Puzzle Using Black’s Criteria

Abstract

This article addresses the dividend puzzle in the corporate finance literature. It extends existing literature that shows that dividends aren’t merely puzzling—they matter for the stock’s duration. Treating stocks as a portfolio of dividends and terminal cash flows, the author shows that the durations of dividends and terminal values are not perfectly negatively correlated, but their values are. The stock’s value is a perfectly hedged portfolio; the stock’s duration is not. Dividend policy matters, and stocks with higher dividends have smaller durations and risks.