Table of Contents
Praise
Title Page
Copyright Page
Dedication
Foreword
Acknowledgements
Table of Figures
Introduction
PART I - THE ART OF DIVIDEND INVESTING
CHAPTER 1 - First Things First
It’s All About the Cash
The Importance of Planning
Our Purpose
A Trusted Approach
CHAPTER 2 - The Case for Investing in Stocks
Investment Needs
Stocks, Bonds, or Cash?
The Case for Stocks
The Growth Rates of Stocks
Knowledge, Strategy, and Tactics
CHAPTER 3 - The Dividend-Value Strategy
The Two Paths of Stock Return
Measures of Value
Quality of Earnings
Rising Dividends Boost Share Price
Why Dividends Are So Important
Total Return Revisited
Quality Tells
The Natural Order
Dividends Still Don’t Lie
CHAPTER 4 - Quality and Blue Chip Stocks
Quality and the Stock Market
What Is a Blue Chip Stock?
The Criteria for Select Blue Chips
The Importance of Dividends
There Is No Profitable Substitute for Quality
CHAPTER 5 - Value and Blue Chip Stocks
Finding Good Value
The Bluest of the Blue Chips
The Faded Blues
Back to Basics
PART II - BARGAINS STILL COME IN CYCLES
CHAPTER 6 - Value and the Stock Market
Dividend-Yield Cycles
Undervalue and Overvalue Cycles
Bull and Bear Market Cycles
Dow Jones Industrial Average Cycles
The Dow Jones Utility Average
Value Cycles
Value Still Prevails
CHAPTER 7 - Finding Undervalued and Overvalued Stocks
A Sophisticated Approach
Undervalued Stocks
The Overvalued Phase
The Rising Trend
CHAPTER 8 - Value, Cycles, and the Dow Jones Averages
Charles H. Dow and the Dow Jones Averages
The Dividend-Yield Theory and the Dow Jones Industrial Average
A Long Blow-Off Top
The Walls Come Tumbling Down
The End Game
The Next Bull Market
PART III - WINNING IN THE STOCK MARKET
CHAPTER 9 - Developing a Successful Stock Strategy
Take Care of Your Business
Investment Goals
Know Your Limitations
Ideal Portfolio Size
Diversify, Diversify, Diversify
CHAPTER 10 - Building and Managing the Dividend-Value Portfolio
Macro versus Micro
Expansion and Contraction
Kaboom and Kabust
Recessions
Recovery
Politics and Markets
Don’t Fight the Fed
A Yen for Dollars, or Pounds, or Euros
Putting It All Together
Portfolio Tactics
CHAPTER 11 - The Stock Market and the Economy
The Stock Market
Industries and Stocks to Watch
The Economy
CHAPTER 12 - Questions and Answers
Dividends
Stocks
The Dividend-Value Strategy
CHAPTER 13 - Conclusion
Recommended Reading
About the Author
Index
Table of Figures
Figure 1.1 Mindful Investment Decisions
Figure 2.1 Rolling 20-Year Holding Periods from 1926-2008
Figure 2.2 Rolling 10-Year Holding Periods from 1926-2008
Figure 2.3 Rolling 5-Year Holding Periods from 1926-2008
Figure 2.4 Inflation Adjusted Rolling 20-Year Holding Periods from 1926-2008
Figure 2.5 Inflation Adjusted Rolling 10-Year Holding Periods from 1926-2008
Figure 2.6 Inflation Adjusted Rolling 5-Year Holding Periods from 1926-2008
Figure 3.1 McDonald’s (MCD)
Figure 3.2 The Dividend-Yield Theory
Figure 4.1 Select Blue-Chip Companies A-Z
Figure 4.2 Blue Chips with 12-Year Average Annual Dividend Growth of At Least 10 Percent
Figure 5.1 Three Fundamental Investor Tools
Figure 5.2 Royal Blue Chips—Highest Investment Quality (A+)
Figure 5.3 DJIA 1896-2008
Figure 6.1 Air Products & Chemicals, Inc. (APD)
Figure 6.2 Undervalue and Overvalue Levels for the DJIA
Figure 6.3 Measures of the Market ( First-September 2009)
Figure 6.4 Select Blue Chip Categories
Figure 6.5 The Trend Verifier Chart (First-September 2009)
Figure 7.1 Finding Undervalue/Overvalue
Figure 7.2 The Stanley Works (SWK)
Figure 7.3 Undervalued Category
Figure 7.4 United Techniologies Corporation (UTX)
Figure 7.5 Overvalued Stocks, mid-September 2009
Figure 7.6 Emerson Electric (EMR)
Figure 8.1 Select Blue Chips Percent Change by Category July 1966 to January 1987
Figure 8.2 Select Blue Chips Percent Change by Category July 1987 to July 2009
Figure 8.3 DJIA 1966 throught 1974 Bear Market
Figure 8.4 DJIA 1965 throught mio-September 2009 Bear Market
Figure 9.1 Hierarchy of Investment Goals
Figure 9.2 Abbott Laboratories (ABT)
Figure 9.3 AT&T; Inc. (T)
Figure 9.4 Nike, Inc (NKE)
Figure 9.5 Sigma-Aldrich (SIAL)
Figure 9.6 The Lucky 13
Figure 10.1 Twenty-Two Stocks
Figure 11.1 Becton, Dickinson (BDX)
Figure 11.2 Johnson & Johnson (JNJ)
Figure 12.1 DJIA 1896-2008
Praise for the original Dividends Don’t Lie (1988)
“Geraldine Weiss, the doyenne of dividend enhancement, has popularized the theory that there is an inescapable relationship between the corporation’s ability to pay consistent dividends over time and its price performance in the stock market. Her respected newsletter, Investment Quality Trends, employs this theoretical basis, and her classic Dividends Don’t Lie is a primer on her theory.”
—Library Journal
“Geraldine Weiss’ dividend yield investment model espoused in Dividends Don’t Lie is basically reiterated and confirmed. This relatively simple,straightforward strategy, limited here to 350 select blue-chip stocks, has regularly outperformed the market (as documented by Mark Hulbert, who tracks investment advisers in his Hulbert Financial Digest).”
—Booklist
“In their technically detailed, conservative analysis, the authors recommend careful study of high grade issues with steady dividend-increase records. Investors should buy shares when the stock is undervalued in relation to dividend yield, then sell (reinvesting elsewhere) when a bullish trend drives the share price up to an overvalue level.”
—Publishers Weekly
“The first dividend accrues to the reader when you buy Dividends Don’t Lie. It is a superb value.”
—Bob Gross, Publisher, The Professional Investor
“A lucid and powerful presentation of one of the best documented investment theories.”
—Peter Brimelow, Senior Editor, Forbes
“Finally, an investment book that deals with values! Values ultimately rule the market and a knowledge of values is always based first and last on dividends. This book should be ‘“the bible of dividends.” ’
—Richard Russell, Publisher of Dow Theory Letters
“I have a lot of respect for the common-sense approach of an investment strategy based on dividends. There is a wonderful order and simplification in this long-term skill which tends to achieve profits by patience rather than clever short-term market moves which do not create income or build capital.”
—James L. Fraser, CFA, President, Fraser Management Associates
To my late grandfather,
Elbert Nelson Dummitt,
my first teacher and mentor.
Foreword
It is with a great deal of pleasure that I introduce Kelley Wright’s new book about the dividend-yield approach to lifelong growth of capital and income in the stock market.
This investment concept first was published in 1966 in what then was a new investment advisory service, Investment Quality Trends. Forty-three years and three books later, the service is still helping investors master the stock market by investing in high quality, dividend paying, blue chip stocks. It helps them know when stocks are undervalued, when they can be bought, and overvalued, when they should be sold.
The importance of dividends in determining value in the stock market cannot be overstated. The main reason investors are willing to risk their capital in anything is to get a return on their investment. In the real estate market, that return is rent. In the money market, it is interest. And in the stock market, it is a cash dividend.
Folks who ignore the importance of dividends in making stock market selections are not investors. They are speculators. Speculators hope that the price of a stock will go up and reward them with profits. Investors know that stocks that pay dividends go up too. Meanwhile, they are getting a return on their capital. They believe the old adage: A bird in the hand is worth two in the bush.
The legendary Charles Dow has written, “To know values is to know the meaning of the market. And values, when applied to stocks, are determined in the end by the dividend yield.”
It is undeniable that many stock market investors are attracted to companies that pay dividends. Unconsciously, investors have established profiles of value for each dividend-paying stock based on historic extremes of high and low dividend yield. Those extremes of yield provide profitable buying and selling areas. A stock is undervalued when the dividend yield is historically high. It is overvalued when the price rises and the yield become historically low.
Let us examine how and why dividends create value in the stock market.
When the price of a stock declines far enough to produce a high dividend yield, value-minded investors who seek income begin to buy. The further the price falls, the higher the yield becomes and the more investors are drawn to the stock. Eventually the stock becomes irresistibly undervalued, buyers outnumber sellers, the decline is reversed and the stock begins to rise. The higher the price rises, the lower the dividend yield becomes and fewer investors are attracted to the stock. Meanwhile, investors who purchased the stock at lower levels are inclined to sell and take their profits. Eventually the price becomes so high and the dividend yield is so low, sellers outnumber buyers and the price of the stock begins to decline. A declining trend generally continues until a high dividend yield is reached that again attracts investors who step in and reverse the trend. At undervalue, the price/yield cycle reestablishes itself and the journey from undervalue to overvalue starts all over again.
It should be noted that each dividend-paying stock etches its own individual profile of value. These profiles of high and low dividend yield are established over long periods of time. There is no one-size-fits-all. Some stocks are undervalued when the dividend yield is 4.0 percent. Some, when the yield is 5.0 percent. Some will decline to yield as much as 6.0 percent or even 7.0 percent before they are historically undervalued. Some growth stocks are undervalued when the dividend yield is as low as 2.0 percent or 3.0 percent. The yields at overvalue are similarly distinctive and individual. Therefore each stock must be studied and evaluated according to its own unique profile of dividend yield, one that has been established over several investment cycles.
Now, here is the best part. Every time a dividend is increased, the prices at undervalue and overvalue move higher to reflect the historically established high and low dividend yields. Therefore, a company that has a long history of consistent dividend increases is most desirable. It promises steady growth of capital as well as continuous growth of dividend income. Frequent dividend increases prolong the life of an investment by raising the price/yield targets at undervalue and overvalue.
Dividends are the most reliable measures of value in the stock market. Earnings are figures on a balance sheet that can be manipulated for income tax purposes. Earnings can be the product of a clever account’s imagination. Who knows what secrets lie in the footnotes of an earnings report? Dividends, however, are real money. Once a dividend is paid, it is gone forever from the company. There can be no subterfuge about a cash dividend. It is either paid or it is not paid. When a dividend is declared, you know that the company is in the black. And when a company increases its dividend, you don’t have to read a balance sheet to know that the company has made profitable progress. In short, dividends don’t lie.
But nothing is perfect in the stock market. There is one problem with the dividend-yield approach. Sometimes an unusually high yield can send a signal that the dividend is in danger of being reduced. When a dividend is lowered, the prices at undervalue and overvalue also are lowered and a price that previously was undervalued no longer represents good value. Therefore, it is critical to make sure that the indicated dividend is adequately covered by earnings.
One way to provide a measure of safety is to confine investment selections to time-tested, high-quality, blue chip stocks with long histories of unbroken dividend payouts and attractive records of earnings and dividend growth. The companies should have reasonably low levels of debt. The stocks should have relatively low price/ earnings ratios. Such stocks have been carefully researched and are listed in this book.
The dividend-yield approach to value in the stock market can be applied to any dividend-paying stock. However, it is most successful when it is applied to high quality, blue chip stocks. The companies reviewed in this book and listed in the Investment Quality Trends advisory service have long dividend histories and well-etched profiles of undervalue and overvalue. Most of them carry a Standard & Poor’s Quality Rank of A+, A, or A-. They are, in fact, true blue chips.
On a personal note, I am very proud of this approach to finding value through the dividend yield. Since it was introduced in 1966, it has helped many investors achieve financial security. It has given investors a sensible method to grow their capital and income and provide for their retirement years. From 1966 to 2002, I was the editor and publisher of Investment Quality Trends.
Now I am retired and enjoying the fruits of my labor and investments. Kelley Wright is continuing to guide investors along the difficult road to financial success. After all these years, I am pleased to note that dividends still don’t lie. Best wishes for your investment success.
GERALDINE WEISS
Acknowledgments
Gloria Patri, et Filio, et Spiritui Sancto. Sicut erat in principio, et nunc, et semper, et in sæcula sæculorum, Amen.
All thanks to the Holy Trinity from whom I have been blessed with the gift of faith, the love and support of my beautiful wife Kathy, and our five incredible children: Trinity Faith, Keegan Patrick, Jillian Grace, Evan Michael, and Christian Blaise.
Although faith and family are sufficient to make any life fulfilling, I have also enjoyed a rich professional life. Without discounting the benefits of my monetary compensation, it is impossible to put a price tag on the affirmation one receives from providing the appropriate solution for a clients’ dilemma, or a value on the life experience and wisdom gained along the way. When all these factors are considered, I am the recipient of an embarrassment of riches.
I realize that while employment, for many people, is a necessity of life; how we embrace that necessity can transform a mere job into a calling or vocation. If, as The Good Book reads, “one must earn their daily bread from the sweat of their brow,” where is it written the sweat of the brow must be ordinary, uninteresting, and without joy? Thankfully it seems no written edict exists except in the hearts and minds of those who have chosen that path. As for me, I can gratefully acknowledge that my road has been blessed. I have had the wise counsel of caring mentors. The practice of my craft has resulted in relationships with truly wonderful people who have shared their hopes, concerns, and dreams with me. Lastly, my journey has been a humbling experience, because these good people have trusted me to help them transform their hopes and dreams into reality.
I am indebted to my late grandfather, Elbert Nelson Dummitt, for preparing the soil, planting the seed, and keeping the garden fertile. His innate sense of value and common sense were lessons of immeasurable worth; his love and patience were boundless. I miss him deeply.
I am also blessed with a good business partner and friend, Mr. Michael Minney. Mike is more than a wingman; he makes sure the i’s get dotted, the t’s get crossed and the nets are in place every time I run off a cliff before I know where I will land. You are my brother from another mother.
Last but certainly not least is my gratitude to the diva of dividends, the incomparable Geraldine Weiss. She broke the mold and shattered the glass ceiling, proving that Wall Street is no match for mom’s common sense and experience. Thank you for your confidence in entrusting me with your baby, but more importantly for your friendship and wisdom. Ad Majorem Dei Gloriam.
Introduction
“Life is the best teacher, boy.” This was my grandfather’s way of saying that the best education is experiential. I am confident he arrived at this knowledge honestly; I know that I did.
I know this to be true as the result of almost three decades of experience as both an advisor and private investor. Experience means you have lost money in the markets, survived, and learned how to invest better. Rest assured that I have a lot of experience.
In 1988, my mentor and predecessor Geraldine Weiss wrote the classic Dividends Don’t Lie. That book detailed the dividend-value strategy behind Investment Quality Trends, the highly successful newsletter Geraldine founded and that I now have the privilege to edit. Twenty-two years hence, the investment world has changed dramatically because of computer technology and the Internet. Tremendous amounts of data and information can be gathered, sorted, and analyzed in a matter of minutes. What used to take weeks or months at a library can now be accomplished in an evening; all one needs is a computer and Internet access.
What hasn’t changed is the success of the dividend-value strategy for producing consistent gains in the stock market. Despite the advent of new technologies and the ability of investors to access information on an unprecedented basis, our old-school technique of using the dividend yield to identify values in blue chip stocks still outperforms most investment methods on a risk-adjusted basis.
Forty-four years after its inception, Investment Quality Trends continues to focus on combining sound stock selection with a long-term orientation because, over time, the stock market rewards investors who recognize and appreciate good value. In fact, the two greatest assets an investor can have are a system to identify quality and the ability to recognize value.
Although the dividend-value strategy has always had its fair share of detractors, critics and criticism have grown exponentially since the mid 1990s and the advent of alternative investments and the evolution of investment theory. Although the vast majority of these advancements have proven to be abject failures, it is still fashionable in some circles to simply dismiss the dividend-value strategy as an offshoot of the buy-and-hold philosophy.
In the simplest of terms, buy-and-hold is making an investment with no intention of ever selling and expecting financial gains into perpetuity. If detractors of the dividend-value strategy had actually taken the time to objectively study its concepts, they would find a clearly defined selling discipline based on repetitive dividend yield patterns; just one of several critical dimensions that are clearly absent in the buy-and-hold philosophy. Putting this and other fallacies to rest is one of the primary purposes of writing Dividends Still Don’t Lie.
We believe the twin pillars of quality and value provide an investment foundation that takes much of the risk and anxiety out of investing in the stock market. We further believe that protecting principal while realizing a tangible return on investment from dividends makes perfect common sense, yet both are routinely dismissed as archaic. To be sure, disagreements among market participants are a requisite element for a properly functioning market, however, disagreements can devolve to a degree of dismissive hubris that allows for the type of irrational exuberance that brought us the worst bear market since the Great Crash of 1929. Interestingly, the current bear market has validated that our thought to be archaic beliefs cannot only survive, but prosper, in virtually any investment climate.
Well into our fifth decade in publication, Investment Quality Trends remains relentless in the pursuit of identifying value in the stock market and in understanding the myriad factors that influence stock prices each day. While this is a fascinating quest, it is not easy, nor are we always right. Our track record of success has been consistently sufficient, however, to affirm we are on the right path.
Although advances in technology provide investors access to more data and information than at any point in history, human nature has remained relatively unchanged since the Garden of Eden. This is to say that having more data and information has not cured the human propensity for being easily seduced by myths and misinformation, which results in missed opportunities and valuable compounding time. Investing is a business and should be treated as such. If you want to gamble, go to Las Vegas. If you have issues that need to be worked out, get a therapist. If you want to be successful in the stock market, learn how to identify quality businesses that offer historic value and then make the most efficient use of your resources.
This book is a short read by design. The game plan outlined here is based on the fact that a stock’s underlying value is in its dividends, not in its earnings or in its prospects for capital gains. More than four decades of research have shown that blue-chip companies, those with long records of consistent, competent performance, are far more predictable than are upstarts or less-established companies with erratic records of earnings and dividend payments. In short, the dividend-value strategy is a proven, commonsense approach that has ultimately led to long-term results.
Although the volume may be light, the content is heavy. With all due respect to the Nobel laureates in economics and finance, the sheepskin isn’t required to be a successful investor. I would suggest that you would do better to mind a good dose of mom’s common sense and a little discipline. If you feel like it’s necessary to do some heavy mathematical and economic lifting to get your money’s worth I can steer you in that direction, but you’ll probably get confused and frustrated trying to implement some esoteric investment strategy you’ll never understand. Don’t be intimidated into thinking simplicity doesn’t work.
Most investors don’t lose money in the markets because they’re stupid; they lose money because they haven’t put in the time and do not understand risk. If you can learn to think through your actions before you take them, you are well on your way to reaching your financial goals.
Lastly, investing is as much about perception and perspective as it is methods and technique. If your gut reaction to an event or situation is that something isn’t right, for gosh sakes pay attention to it! “Opportunity,” Geraldine says, “is like a streetcar; another one will come along soon.”
PART I
THE ART OF DIVIDEND INVESTING
CHAPTER 1
First Things First
We don’t receive wisdom; we must discover it for ourselves after a journey that no one can take for us or spare us.
—Marcel Proust
I am not a therapist, and this book is not a journey into navel gazing and self-discovery. That being said, you have to get this part right.
Investor psychology and sentiment play a significant role in how you approach investments and the investing process. In my experience the most successful investors have had an end goal in mind that they wanted to achieve, which necessarily dictated the majority of their investment decisions. This is not to say that you can’t be a successful investor without having a game plan mapped out, but understanding your motivation for putting your hard-earned money at risk in the markets can help you avoid taking unnecessary risks.
With that in mind, forgive my waxing philosophical for a moment. If September 11, 2001 has taught us anything, let’s hope it’s that life is precious and time is valuable. If you accept this premise as true, you would agree with me, then, that ideally, we should spend as much time as possible in this life to find and embrace our passions; those activities that make our hearts swell and our souls soar.
The reality though is that we don’t live in an ideal world. As human beings we have to spend a significant portion of our time providing for the practical necessities: food, clothing, housing, transportation, education, recreation, and medication. The means by which we acquire these necessities is called cash.
It’s All About the Cash
Generating sufficient cash to meet your needs will be a primary objective until you die. If you have loved ones you are responsible for, they will continue to need cash after you die.
During the employment years, you must make wages, salaries, and bonuses do double duty, providing for current needs while investing for the future. Optimally, the invested cash will generate sufficient interest, dividends, and capital appreciation to meet your future needs when your wages, salaries, and bonuses are no longer your primary sources of income. Your long-term challenge then will be to balance your cash flow between your current cash needs and your need to accumulate cash for the future. Your level of success in this endeavor can be positively impacted by a modicum of financial planning.
Financial planning is an excellent exercise and a useful tool to organize your financial activities and to create a disciplined structure. Although some practitioners can overwhelm you with the minutia, an understanding of your current cash flow and budget is sufficient to make some reasonable assumptions for a retirement budget. This information will provide a working framework for how much you need to save, the required rate of return on those savings to meet your goals, and how much insurance you need to protect yourself and your loved ones should you become disabled or die prematurely. Armed with that information and this book, you can accomplish the rest.
Technology has changed the world, our culture, and social mores. This new era of interconnectivity has accelerated the pace at which we receive information and process its applicability to our lives. By extension, the workplace and the work ethic have evolved as well. The time when one would choose a career track with one employer or within one industry from beginning to end has vanished. Second, third, and even fourth careers are now commonplace. Again, by extension, retirement or at least the concept of retirement has also evolved. The twentieth-century model of moving from employment to the golden years in pursuit of leisure has morphed into the reality that for many, whether by choice or necessity, a portion of the golden years now includes some form of continuing employment.
The recession and cyclical downturn in housing beginning in 2008 notwithstanding, the long-term economic reality is that historically the cost of living increases year after year. Unless your cash flow increases at the same rate as the cost of your expenditures, you will have to decide between spending on current needs and investing for future needs.
Barring a major depression or the end of the world, the cost of living and the average life span will most likely continue to increase. Assuming I am correct, you need to be prepared for the rising cost of the practical necessities for a greater amount of time. This is to say you are going to need a lot of cash. Granted, we all have unique circumstances and situations, so how we approach spending and investing will vary by the individual. Regardless of the myriad factors to consider, don’t just stick your head in the sand and hope for the best; hope is not a strategy for success.
The Importance of Planning
As an investment advisor, I have witnessed too frequently the stress and anxiety of investors who have underestimated their cash needs for retirement. Because retirement planning didn’t gain wide acceptance until the early nineties, too many waited to properly fund their 401(k) plans, IRAs, and after-tax investments and savings, and/ or they weren’t properly invested. I can’t tell you how many people have told me that they thought that Social Security would make up the difference. Although Social Security worked well when the demographics were more favorable, ensuring benefits for future recipients required changes in the system that were never instituted. Today we are faced with the prospect of a bankrupt program. Although there are voices that advocate long-needed reforms, I would suggest that there will not be any significant changes made to Social Security because it is politically too hot to handle. For the reader below 40 years of age this is unfortunate; I wouldn’t count on Social Security being available to supplement your retirement. Let’s all hope that I am very, very wrong.
Undoubtedly there are some readers who are proactive and better prepared, who embraced retirement planning early on by funding a 401(k), an IRA, and after-tax investments. By design or by luck, some will have invested well and will be on track; others won’t be so lucky. If you are unsure about where you stand, don’t guess. If you need help, engage a fee-based financial planner. Your tax preparer or attorney should have some ready references. Whether you go it alone or require some assistance, however, just make sure you get it done. Knowing what you need and when you will need it is critical to the investment process. When it comes to your future, don’t be afraid to ask questions.
In my experience, few people have the answers to these questions off the top of their heads. It isn’t that they aren’t capable, but most people prefer to concentrate on activities they find more attractive. I understand that perspective because most people naturally gravitate to what most interests them. Some of us are butchers, others are bakers, and many are candlestick makers. So I say again, don’t guess; find out what you’ll need so you get your goals and objectives in focus, and then we can help you with the rest.
If you know what your goals and objectives are, you are well on your way to achieving investment success. At the end of the day, successful investing is realized by three activities: know the end goal(s) of why you are investing; use an investment approach that makes sense to you and can generate returns sufficient to meet your goals; and, keep an eye on taxes and expenses.
The three activities, shown in Figure 1.1
