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The Daily Dow LEXINGTON, Kentucky (December 11) -- A question that comes up occasionally and goes right to the heart of our Dow Dividend Approach concerns the second screen, the one based on a stock's price. Most people intuitively see the link between high yields and value, but why low price? Why not something else like low P/E? Michael O'Higgins, author of Beating the Dow (available in our FoolMart store, incidentally), tested a myriad of variations and found that of all the criteria he tested, the simple high-yield test performed the best, better the P/E ratios, better than book value ratios, better than Price/Sales ratios, etc. But within that group of ten highest yielders he noticed that the ones with the lowest stock prices performed better than the ones with the highest yields. And it hinges on something inherent in turn-around stocks, the assumption that they're going back up. Given that we expect all ten stocks to go back up, how does one choose among those ten? Well, since we're buying out-of-favor stocks, we actually want volatility (since we're assuming it will be volatility to the upside). And in volatile stocks, the ones with the lowest prices get swept along more rapidly. It's much like white water. Put a small piece of balsa wood in a torrent and it gets swept along the surface at enormous speed. Put a big log in the torrent and it'll move quickly, but that lighter balsa chip will zoom past it. Going back to stocks, look at a $20 stock versus a $100 stock. They both get caught up in strong market moves, but a similar dollar gain will affect the cheaper stock much more dramatically. A $2 move in the cheap stock is a 10% gain. The same $2 in the behemoth is only a 2% profit. It doesn't work perfectly every time, of course, but on average the lower-priced stocks will out-perform the higher-priced issues in the high-yield group, enough so over the decades that it makes the approach consistently out-perform a straight high-yield model. For the year-by-year results of many variations, check out the 35-year database available in FoolMart. Today's Dow Numbers Stock Change Bid ------------------- DD -2 1/2 92.63 CHV - 3/4 62.88 MMM -1 1/4 83.13 EK - 7/8 80.38 IMN - 1/8 32.88
Day Month Year History
FOOL-4 -1.48% 0.75% 27.46% 27.46%
DJIA -1.09% -1.83% 25.12% 25.12%
S&P 500 -0.91% -2.31% 20.26% 20.26%
NASDAQ -0.26% 1.28% 24.42% 24.42%
Rec'd # Security In At Now Change
1/2/96 142 DuPont 69.88 92.63 32.56%
1/2/96 149 3M 63.76 83.13 30.37%
7/16/96 14 Imation 26.16 32.88 25.68%
1/2/96 380 Chevron 52.38 62.88 20.05%
1/2/96 148 E. Kodak 67.00 80.38 19.96%
Rec'd # Security In At Value Change
1/2/96 380 Chevron 19902.50 23892.50 $3990.00
1/2/96 142 DuPont 9922.25 13152.75 $3230.50
1/2/96 149 3M 9500.09 12385.63 $2885.54
1/2/96 148 E. Kodak 9916.00 11895.50 $1979.50
7/16/96 14 Imation 366.21 460.25 $94.04
CASH $1942.85
TOTAL $63729.48
Transmitted: 12/11/96
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