This paper develops a simple dividend discount model to resolve the conflicting evidence of a large negative (Ang, Hodrick, Xing, and Zhang (AHXZ, 2006)) versus large positive (Fu (2009)) rela-tion between idiosyncratic volatility (IVOL) and average returns. In the proposed model, IVOL strongly predicts the cross section of average returns, even when it is unpriced. That predictive ability is attributable to the relations of IVOL with dividend size and expected dividend growth, both of which are related to risk premiums. In particular, firms with small dividends exhibit high IVOL and high expected returns, while low dividend growth firms have high IVOL and low expected returns. Empirical evidence strongly supports the model’s novel prediction of a negative relation between IVOL and firm growth. Moreover, consistent with model predictions, IVOL is positively related to returns in the dividend size dimension and negatively along the dividend growth dimension. Finally, the AHXZ and Fu measures are more closely aligned with dividend growth and dividend size, respectively, consistent with their opposing relations with IVOL.