The Daily Dow
Thursday, November 13, 1997
by Robert Sheard

LEXINGTON, KY. (Nov. 13, 1997) -- Two questions have cropped up frequently of late. The first is a result of recent market volatility, as people ask, "What happened to so-and-so stock? It was #2 in the rankings last week, and now it's gone!" The second has to do with stock splits. Both questions, in fact, have to do with the dual screens we use in the Dow Dividend Approaches.

The Dow Approaches use a primary screen based on dividend yield. To be considered for purchase using these variations on the Dogs of the Dow, a stock has to be among the ten Dow stocks with the highest yields. If a stock is eleventh or twelfth, too bad; it rides the pine until it can break into the top ten.

But once we have our top ten, the rankings for variations like Beating the Dow, the Foolish Four, and Unemotional Value are no longer determined by yield, but by stock price. The number one stock isn't necessarily the highest yielder, but the stock within the group of ten with the lowest stock price. So it's quite possible for a stock that barely made the first cut (the tenth highest yielder, for example) to be first or second or third in the price rankings we use to determine the Foolish Four.

If that stock suddenly slips to number eleven on the high-yield list? Yep, it's benched -- out of the rankings altogether. If you already hold it, that doesn't mean you should suddenly sell; it simply means you wouldn't buy more of it today if you were investing new money. You should always hold your Dow purchases a full year (a year and a day if it's in a taxable account).

Which brings us to the second question. Isn't a stock split an arbitrary event, and wouldn't that unfairly move a stock into the top ten yielders? Yes and No.

Yes, a stock split is an arbitrary event. If J.P. Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> trades at $120 on Monday and splits two-for-one on Tuesday, is the company's business any different at $60 a share? Of course not. Then doesn't the lower price boost the yield unfairly? (Normally, the yield for a stock rises as the price goes down, assuming the dividend remains the same.)

No, because when a stock splits its price, it also splits the dividend payment in the same proportion. So the stock split actually has no effect on the yield at all. If the company paid $2.32 a share in annual dividends before the split, it would pay $1.16 a share after the split. In both cases, the yield would be 1.93%. So a stock split alone is not enough to move a stock into the group of highest yielders.

If a stock is already among the highest yielders, though, a stock split does indeed have an effect on the company's ranking within our price list. A stock ranked seventh or eighth on the Beating the Dow list might jump to second or third after a split. That's in our favor, however. There's a documented correlation between lower prices and higher future volatility, and since we assume all ten high-yield Dow stocks are good candidates for future gains, we want to capitalize on higher-volatility stocks.

So, don't be surprised to see a highly ranked Beating the Dow (Foolish Four) stock suddenly drop off the current rankings list altogether. It just means the stock's yield moved below the tenth and final spot, even if only for a few days. And don't worry about stock splits; they don't foul up the Dow Dividend Approach works. If you ever have any questions about the current rankings, I post a file each evening listing the high-yield rankings, the price-order rankings, and then the actual prices, dividends, and yields for each of the thirty Dow stocks. Fool on!

TODAY'S NUMBERS
Stock  Change   Last
--------------------
T    +2  1/8   48.88
GM   -   3/4   62.25
CHV  -   1/16  82.00
MMM  -   3/8   95.06

           
                  Day   Month    Year
        FOOL-4   +1.41%  -0.01%  19.53%
        DJIA     +1.17%   0.61%  16.12%
        S&P 500  +1.18%   0.22%  23.75%
        NASDAQ   +1.04%  -2.25%  20.66%

    Rec'd   #  Security     In At       Now    Change
   1/2/97  153 Chevron       65.00     82.00    26.15%
   1/2/97  479 AT&T          41.75     48.88    17.07%
   1/2/97  120 3M            83.00     95.06    14.53%
   1/2/97  179 Gen. Motor    55.75     62.25    11.66%


    Rec'd   #  Security     In At     Value    Change
   1/2/97  479 AT&T       19998.25  23411.13  $3412.88
   1/2/97  153 Chevron     9945.00  12546.00  $2601.00
   1/2/97  120 3M          9960.00  11407.50  $1447.50
   1/2/97  179 Gen. Motor  9979.25  11142.75  $1163.50


                             CASH   $1257.01
                            TOTAL  $59764.39