A Summer Stroll -- Part 1

Many of you reading this blog may already be dividend believers, and all I have to do is say dividend, and it has a fully formed meaning to you. I would be willing to guess that many of your fully formed good feelings about dividends are wrong. Others of you are absolutely clueless as to dividends having any value at all. You don't know that you are wrong, but you are. I think I know a lot about dividends, but I'm sure I'm off base in some areas, as well. I'd like to take a stroll this summer with any of you who want to come along and move beyond the concept of the dividend to the reality of what it means to invest, and what we mortals can expect. To do that I want to tell you a story. I will do it in small snippets, so I can be consistent and get us through this by the end of the summer. You may pass along this blogsite to anyone you like for our journey, and please do so. I find I understand what I know and believe, best, through other people's questions. I can't answer every question, but I'll try to give a general reply to areas of questions. This blogsite is an inhouse organ of a money management firm. It will be open only until the fall. After that we will close the door and only allow our clients and employees to view it. It is now open to the public to see how many people have an interest in dividends and are they digging deeply enough to find us. Within in the next few days, I will begin the walk. Get ready, I think you'll find it interesting.

Noise

Stocks fell by 420 points during a three-day rout last week. The question on a sunny Monday morning is: what's going on? But really isn't that the question that could be asked any day of any week, and 99% of the time the answer is -- nothing. It's just noise, or as academia says, randomness on display. There is no predictive power for the market's year ahead rate of return from the market's action last week and certainly none for the market's three year performance. Yet, the media will twist this around the neck of somebody or something until we are sick of it. If we want to deal with what is really going on we need look no farther than the dividend. Over the last 45 years, there has been a 92% correlation between the annual dividend of the DJIA and its price. If we add interest rates as a variable, there is almost a 95% correlation to price. Now, we are talking about something significant -- not noise or randomness. If we plug in today's dividend of $216, the historical correlation reveals the market should be trading at 11,099. If we add interest rates to the mix, the projection points to a 11,542. Either way, stocks are too cheap. The bottom line is with dividends for Dow Companies expected to rise 10% this year, and with our model saying the Dow is already 10%-15% under priced, the Dow, from a statistical perspective, now has less risk, not more as the pundits would have you believe.

Dividends on the Rise

Standard and Poors has just released their first quarter analysis of dividend actions by the 7000 companies in their universe. The number of companies increasing their dividends in the quarter grew by 16.9% over 2004 and 29.7% vs the same period in 2003. S&P believes the dividend increases will continue because of three forces: 1. very strong growth in cash flow, 2. dividends are now taxed like capital gains, and 3. the meandering stocks market. They make the point that the meandering stock market will likely prompt companies to show their shareholders the money in the form of dividends and rely less on share buy backs. S&P believes that dividends have returned to favor among investors much more than we do, but we agree with their assertion that in these wobbly stocks markets, cash dividends will catch the attention of more and more investors.