Dividend Data Suggests Caution

As editor of the La Jolla-based investment newsletter Investment Quality Trends, Geraldine Weiss has become the market's Grand Dame of Dividends. Her attitude toward a stock is determined largely by the dividend--how much cash a company chooses to pay out to shareholders, the size of that payout relative to the stock price, and how it grows.

To Weiss, the dividend is a basic measure of a stock's value. And right now, Weiss doesn't like what she sees--peace or no peace in the Persian Gulf. She says stocks have risen so high that the dividend yield on the average stock--the annual dividend per share divided by the stock price--has shrunk to a dangerously low level.

Her message, in brief: It's too late to buy. Wait for lower stock prices.

There are plenty of bulls who disagree with her, but here is Weiss' case:

* The Dow average dividend yield now is 3.4%. That's based on annualized dividends of $98.06 a share (totaling dividends of the 30 Dow stocks), divided by the Dow's close of 2,891.83 on Thursday.

* Historically, whenever the Dow dividend yield has fallen near 3%, it has signaled a market top. In fact, Weiss contends that a 3% yield "has marked major market tops as far back as our research extends, including the peak in 1929."

* The recent market surge is nothing more than a bear market rally and it will soon give way to a broad slide that will take the Dow as low as 1,634. At that level, the dividend yield would be 6%--which historically has been the high point for the yield, and thus the low point for stock prices.

The dividend thesis is based on the concept that most investors expect some kind of regular cash return on stocks, not just capital appreciation. When the average stock dividend yield is too low relative to other alternatives, such as money-market yields or bonds, investors can be expected to shy away from stocks until yields improve. And dividend yields can improve in one of two ways: Either stock prices fall, or companies raise their dividends.

But what about investors' willingness to buy on every market dip since the Gulf War began in January? Weiss says it's quite possible that stocks could go higher in the short term. She notes that the Dow yield wouldn't actually fall to 3% until the Dow reaches 3,269--a 13% surge from here.

But Weiss would rather not stay around for the last few hundred points. "When you get within 10% of that (target) level, you get into very pricey territory," she says. "It's just a prudent road to follow because this has happened so many times."

Hold on, though. The Dow yield fell as low as 2.6% at the market top in August, 1987. If we go that low this time, the Dow could reach 3,800.

That's possible, Weiss says. But the 2.6% yield in 1987 "was the lowest ever recorded," she says. If you want to bet on history repeating, be her guest. She'll sit this one out.

One of the bulls who begs to differ is Norman Fosback, who like Weiss is a veteran analyst and a close follower of the dividend yield. Fosback, who writes the Market Logic letter from Ft. Lauderdale, Fla., agrees that "the dividend yield has been a very good long-term indicator."

But the yield is just one of many indicators that shape the market, Fosback says. For now, he says, too many other indicators suggest a continuing rally. One major force driving stocks is simply the high level of cash held by institutional investors, many of whom remain eager to buy, Fosback says.

He also notes that, in the past, "the market has persisted for years at a time with the dividend yield where it is now." Stocks could rally further and then just stall out rather than plunge, say the bulls, as investors wait for companies to raise their dividends and thus boost share values.

Weiss, however, points out that the sinking economy has made it very difficult for most companies to raise dividends. And in fact, one reason the Dow's yield is dropping is because dividends are going in reverse . In recent months, General Motors and Goodyear Tire, two of the 30 Dow stocks, have slashed their dividends because of their poor profit outlook.

Weiss has a pretty solid record of stock picking. From 1986 through 1990, her recommended stocks gained 80%, versus 70% for the broad market, according to investment newsletter tracker Mark Hulbert of Alexandria, Va.

Is she right this time? History says the 3% yield level is a definite barrier for the Dow. But as Weiss herself admits, at 3.4% now, this rally could go on.

If nothing else, the dividend indicator is a warning: Don't throw all your cash into the market now, because historical measures of value are signaling caution. If you want to buy, do it in stages over the next six months or so. Patience rewards long-term investors; knee-jerk investors usually end up kicking themselves.

Briefly: Speaking of dividends, the phone company on Thursday finally answered a question many shareholders have been asking. At a meeting with analysts, Pacific Telesis Vice Chairman John Hulse said shareholders could expect annual dividend hikes to continue in the 5% to 7% range. When PacTel reported lousy fourth-quarter earnings in January--and forecast weak results for the first half--some analysts wondered if that heralded a smaller-than-usual 1991 dividend hike. PacTel raises the dividend once a year, each March. Last year, it was raised 7.5%. At $2.02 a share, the current annual dividend yields 4.8% based on PacTel's Thursday close of $41.875. (The stock slipped 12.5 cents for the day.)

THE DOW DIVIDEND INDICATOR

At a dividend The Dow Pct. difference yield of: would be: from current Dow 3% (usual low) 3,269 +13% 3.4% (current) 2,892 -- 6% (usual high) 1,634 -43%

Source: IQ Trends newsletter

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