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Case Problem 6.2 Wally Wonders Whether There’s a Place for
Dividends
Wally Wilson is a commercial artist who makes a good living by doing
freelance work—mostly layouts and illustrations—for local ad agencies
and major institutional clients (such as large department stores). Wally
has been investing in the stock market for some time, buying mostly
high-quality growth stocks as a way to achieve long-term growth and
capital appreciation. He feels that with the limited time he has to devote
to his security holdings, high-quality issues are his best bet. He has
become a bit perplexed lately with the market, disturbed that some of his
growth stocks aren’t doing even as well as many good-grade income
shares. He therefore decides to have a chat with his broker, Al Fried.
During their conversation, it becomes clear that both Al and Wally are
thinking along the same lines. Al points out that dividend yields on
income shares are indeed way up and that, because of the state of the
economy, the outlook for growth stocks is not particularly bright. He
suggests that Wally seriously consider putting some of his money into
income shares to capture the high dividend yields that are available.
After all, as Al says, “the bottom line is not so much where the payoff
comes from as how much it amounts to!” They then talk about a high-
yield public utility stock, Hydro-Electric Light and Power. Al digs up
some forecast information about Hydro-Electric and presents it to Wally
for his consideration:
The stock currently trades at $60 per share. Al thinks that within five
years it should be trading at $75 to $80 a share. Wally realizes that to
buy the Hydro-Electric stock, he will have to sell his holdings of CapCo