Dividend Inc

PCAOB: Our Protectors, Encouraging Malfeasance

Greetings Robert,

Thank you for your comments on my article. Your thoughts carry much more weight considering the wonderful website that you are associated with. Thanks again.

-Touc

Dow-Jones' Decline Largely Impacted by Index Changes

Greetings SivBum,

I completely agree with your comment that the purpose of the index isn't to pick stocks with strength but to reflect the overall market. However, you need strong companies to last long enough to actually reflect the market. Otherwise, the companies chosen would go out of business and then have to be be replaced. As you'll see below, many other stocks that went in and out of the index never were either obsolenscent or bankrupt.

Although AIG has been nationalized it conceivably could still be in the index. After all, even though the rails were nationalized in 1914 they still were part of the Dow-Jones Transportation Index.

Regarding changes to the Dow it should be noted that many companies have been added and dropped in that fashion of an inexperienced trader. Here are some notable examples:

-American Tobacco was dropped in 1899 and added in 1924, was dropped in 1928 and replace with the American Tobacco B shares, B shares were dropped in 1930

-General Electric was dropped in 1898, added in 1899, dropped in 1901, added 1907.

-IBM was added in 1932, dropped in 1939, added in 1979

-International Paper preferred shares were added in April 1901, dropped July 1901, common shares were added in 1956, dropped in 2004.

-Remington Typewriter was added in 1925, dropped in 1927

-Texaco or Texas Company was added in 1916, dropped in 1924, added in 1925, dropped in 1997.

-Goodrich was added 1916, dropped in 1924, added in 1928, dropped in 1930.

-Coca Cola was added in 1932, dropped in 1935, added in 1987.

The evidence seems to indicate that the managers of indices act like traders rather than trying to reflect the overall economy or market.

Thanks for your comment SivBum.

Dow-Jones' Decline Largely Impacted by Index Changes

Greetings Jay,

Thank you for your comment on my article.

The fact that Dow-Jones has demonstrated a lack of judgment in the timing of the selection of their companies is only one issue. Another problem is that index managers exhibit herd mentality.

Because the S&P 500 was created in 1957 and backward calculated, there is no way to see how the S&P managed their index back in 1929. However, you can seen exactly the same decisions that Dow-Jones made by the teams at S&P. S&P added and dropped companies in a similar fashion that Dow Jones did.

Regarding the Russell 2000, that index was created, from what I can tell, in 1984. Russell indices also seem to exhibit bias towards changing their index when S&P and Dow-Jones make changes by switching out companies that have hit bottom with companies that are still in the position to fall further.

Again, my article wasn't an effort to demonstrate that companies will go up or down based on being in an index or that earnings aren't important. Instead, I was trying to demonstrate that the creators of the indices are prone to chacteristics of novice traders.

Regarding your question of the similarity of market movements, there is surprising evidence that although similar, the indices movements isn't the same. I have addressed this issue in a prior Seeking Alpha article at: seekingalpha.com/artic...

Thanks again Jay.

On Apr 22 10:00 AM jay fredrickson wrote:

> Good article but it doesn't really go anywhere. So the DJIA is wrong
> to move stocks in and out? What would explain similar moves to the
> S & P 500 and the Russell 2000? Seems like on face value you
> are correct, but the potential for companies to earn money in the
> future is still the main reason for stock price movement, up or down.
>
>
> jay
>
> irelandcheap.com

When to Sell Dividend Stocks

Greetings Dividend Growth Investor,

The question of dividend cuts is fascinating since it is actually a potential buy signal rather than a sell signal. All dividend cuts take place after the stock has taken the largest portion of the declines that are likely to occur (in the short and medium term.)

A dividend cut reflects the company management's realization that action needs to be taken in order to shore up the company's finance. Once the cut takes place, an investor can then fairly assess the potential for a healthier balance sheet.

Another method for avoiding the decline in dividend paying stocks is to sell when the stock is selling at a historically low yield and buying at a historically high yield. This keeps the perspective on the company in relative terms rather than trying figure out when management is going to make the tough decision to cut the dividend long after the decline has taken place.

Some good sources for understanding this and other key dividend investing concepts without having to do the work yourself is found in the Investment Quality Trend newsletter (www.iqtrends.com). In their newsletter, IQTrends gives you the historical high and low yields for over 300 high quality dividend paying stocks. Another good source is the book Relative Dividend Yield by Anthony Spare and Nancy Tengler. Finally, my all time favorite is Mergent's Dividend Achievers (mergent.com/productsSe...) as recommended by Peter Lynch in the book Beating the Street.

Because of these sources of information, I had a great 2008 and I think that they will benefit anyone who takes careful consideration of the ideas contained within. Enjoy.

Touc
Dividend Inc.
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