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It may not be immediately obvious, but it should be. If you are using this formula to guide your investments, you need to understand it, and anyone who understands even just the math can see that it is a formula that uses dividend yield and price -- both -- to identify potentially good stocks to buy. But beyond the math, one needs to understand that it is a formula that has been tested and shown to work for a very specific kind of stock. If that's not very clear to you, please click here.
The Foolish Four and its parent strategies, Beating the Dow and the Dogs of the Dow, as well as its brother, Beating the S&P, ALL concentrate only on very large, well-established, U.S.-based, blue-chip companies that pay substantive dividends. That's not the Nasdaq! By definition, it's not the NOW 50. Rule Makers may fit the picture a bit better, but there's no requirement for Rule Maker stocks to pay any kind of dividend.
The reason the RP formula works is that it is restricted to the kind of company that has the resources, history, brand recognition, and sheer magnitude to recover from a temporary setback that the market may have overreacted to. It's that simple. Only a small number of companies fit that description, and of those that do, we still have to limit the use of the formula to those that pay dividends.
Trying to use the RP formula (or the older yield/price formula) to select stocks from other indices, just because it has worked well for the Dow and Dow-like stocks, is like thinking you can use Consumer Reports to find a spouse because it was so good at picking reliable cars.
Even if the methodology made sense for the NOW 50, which it doesn't, trying to apply the RP formula to the NOW 50 would most likely be a disaster. Yes, we hope the NOW 50 will replace the Dow as the most relevant stock index for investors, but we didn't select NOW 50 companies because they were like Dow companies -- in many cases we were looking for companies with the opposite characteristics. Dow companies are supposed to be stable; we were looking for dynamic. Dow companies are industry leaders; we wanted at least a few industry creators. And we paid no attention at all to dividend history. I still couldn't tell you how many NOW 50 companies pay a dividend!
So stop trying to open that tuna can with your toaster, and please be sure you understand the tools you are using when you invest your very hard-earned money!
Fool on and prosper!