American Investment Services, Inc.

Disciplined, Diversified, & Cost Effective

Aug. 2002 – CEOs Might Lie – Dividends Don’t

Corporate malfeasance has shattered investors’ confidence in corporate America. The great bull market that began in the early 1980s exacerbated a trend whereby anticipated and announced quarterly earnings were trumpeted by Wall Street above all other considerations. With only three mild recessions, earnings grew steadily, as did stock valuations. But recent corporate revelations and the market’s subsequent swoon suggest that some more tangible measure of value might be more appropriate.

Throughout the bull market and subsequent crash, we consistently emphasized that while earnings are a creature of accounting, dividends are actual distributions of cash, and dividend yield is a simple but demonstrably useful gauge of risk and expected return. We are confident that our high-yield Dow model, if applied consistently over a long time frame, will prove far more effective than relying on analysts’ guesses regarding anticipated estimated and actual earnings. The model’s long-term returns are summarized on page 62.

The components of those returns are especially interesting. Between 1964 and 1995 dividends accounted for roughly 30% of the total returns of the model. Later, during the dramatic run up of the late 1990s, dividends accounted for less than 20% of total return, as accelerated capital appreciation pushed yields below 3%. The point is that dividends can be relied upon for a considerable portion of returns as long as payouts are maintained. The charts on page 61 demonstrate that the current stocks in the model have solid records in that regard.

It remains to be seen whether investors will flock to high-yielding shares as more and more former “high flyers” admit to erroneous accounting practices. U.S. Treasury bills are yielding a mere 1.6%, and interest rates might well drop further. The average dividend yield of 4.1% on our recommended stocks may indeed attract attention in this environment. However, events can change quickly; investors’ best course of action is to simply devote a reasonable allocation to our model portfolio consistent with their tolerance for risk.

Also in This Issue:

A Simple Solution to Stock Market Woes: Kill the Corporate Dividend Tax
Stable Dividends: Vital to the Strategy
Common Stock Trends
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield