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Books Finance Dividends Still Don't Lie
Dividends Still Don't
Lie
by Kelley Wright 2010 272 pages
3.82 100+ ratings
Finance
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Key Takeaways
1. Dividends are the most reliable
measure of a stock's value
Dividends are still the most reliable component of
investment return because dividends are still real money.
Tangible proof of profits. Dividends provide concrete evidence of a
company's financial health and profitability. Unlike earnings reports, which
can be manipulated, dividends represent actual cash payments to
shareholders. They demonstrate that a company is generating sufficient
earnings to cover expenses, pay interest on debt, grow the business, and
reward its owners.
Predictor of growth. A rising dividend trend is a strong indicator of future
growth potential. Companies typically increase dividends only when
management is confident in the company's ability to sustain higher
payments. This confidence often stems from expectations of improved
earnings and overall financial stability.
Value indicator. Dividend yield, calculated by dividing the annual dividend
by the stock price, serves as a key measure of a stock's value. Historically
high dividend yields often signal undervalued stocks, while historically low
yields may indicate overvaluation. This pattern forms the basis of the
Dividend-Yield Theory, a powerful tool for identifying attractive investment
opportunities.
2. Quality blue chip stocks offer the best
potential for long-term wealth building
Blue chips with low debt levels and higher returns on equity
will be more stable in terms of share price during periods of
rising interest rates.
Defining blue chips. Blue chip stocks represent high-quality companies
with long histories of consistent performance, strong financial positions,
and reliable dividend payments. These companies typically have:
A+ to A- quality rankings from rating agencies
At least 25 years of uninterrupted dividend payments
Consistent earnings growth
Low debt-to-equity ratios
Substantial institutional ownership
Advantages of blue chips:
Greater stability during market downturns
Higher probability of dividend growth
Better positioned to weather economic cycles
Strong brand recognition and market leadership
Long-term performance. While not immune to short-term volatility, quality
blue chip stocks have historically provided superior long-term returns
compared to lower-quality stocks or other asset classes. Their combination
of capital appreciation potential and growing dividend income makes them
ideal for building wealth over time.
3. Understand and utilize the Dividend-
Yield Theory for optimal stock selection
To know values is to know the meaning of the market. And
values, when applied to stocks, are determined in the end by
the dividend yield.
Fundamental concept. The Dividend-Yield Theory posits that a stock's
price is primarily driven by its dividend yield. This theory provides a
framework for identifying undervalued and overvalued stocks based on
their historical dividend yield patterns.
Key principles:
Each stock has a unique profile of undervalue and overvalue dividend
yields
High dividend yields attract buyers, pushing prices up
Low dividend yields discourage buyers, allowing prices to fall
These cycles repeat over time, creating predictable patterns
Practical application. Investors can use the Dividend-Yield Theory to:
1. Identify optimal buying points when yields are historically high
2. Determine selling points when yields are historically low
3. Gauge overall market valuation using broad market indexes like the
Dow Jones Industrial Average
By focusing on dividend yields rather than price alone, investors gain a
more reliable measure of value and a clearer picture of potential returns.
4. Identify undervalued and overvalued
stocks using dividend yield patterns
It's hard enough to find good values. When a stock rises
slowly, intrinsic value can keep pace with the gradual
increase in the price of the stock.
Establishing yield patterns. To identify undervalued and overvalued stocks:
1. Chart dividend yields over a long period (15-25 years is optimal)
2. Identify repetitive high and low yield points
3. Calculate average yields at these turning points
4. Use these averages to establish undervalue and overvalue boundaries
Undervalued stocks:
Offer historically high dividend yields
Present lower downside risk and higher upside potential
Provide opportunities for both income and capital appreciation
Overvalued stocks:
Display historically low dividend yields
Signal reduced upside potential and increased downside risk
May present opportunities to take profits or reduce position sizes
Importance of patience. Value opportunities don't always materialize
immediately. Investors must be willing to wait for the market to recognize
undervalued stocks and for overvalued stocks to correct. This patience is
often rewarded with superior long-term returns.
5. Economic cycles and market trends
influence stock performance
Business, the economy, and the markets move in cycles, not
in straight lines.
Understanding economic cycles. The economy typically moves through
four phases:
1. Expansion
2. Peak
3. Contraction
4. Trough
Each phase can impact different sectors and industries in various ways,
influencing stock performance.
Market trends. Three primary trends affect stock prices:
1. Primary trend (long-term)
2. Secondary trend (intermediate-term)
3. Minor trend (short-term)
Investors should focus primarily on the primary trend while using secondary
trends to refine entry and exit points.
Sector rotation. Different sectors tend to outperform at various points in
the economic cycle:
Early cycle: Consumer discretionary, financials, industrials
Mid-cycle: Technology, communication services
Late cycle: Energy, materials, utilities
Recession: Consumer staples, healthcare, utilities
By understanding these cycles and trends, investors can better position
their portfolios for success across different market environments.
6. Diversification is crucial for
managing risk in a stock portfolio
If you do everything right, have well-defined goals and
objectives, choose asset classes that are appropriate for your
time horizon and risk tolerance, select only the highest-
quality stocks that represent historically good value, but fail
to diversify across a broad number of industries and/or
sectors, it can totally negate all of your preparation and
hard work.
Importance of diversification. Spreading investments across various
sectors and industries helps mitigate company-specific and industry-
specific risks. This strategy can help protect a portfolio from severe losses
if a particular sector experiences a downturn.
Optimal portfolio size:
Aim for 20-25 stocks across different industries
Limit exposure to any single industry to 10-15% of the portfolio
Consider geographic diversification for additional risk reduction
Balancing act. While diversification is crucial, over-diversification can dilute
returns and make portfolio management more challenging. The goal is to
achieve sufficient diversification to manage risk while maintaining a
concentrated enough portfolio to benefit from the outperformance of high-
quality stocks.
7. Develop a disciplined approach to
buying, holding, and selling stocks
If you can learn to think through your actions before you
take them, you are well on your way to reaching your
financial goals.
Buying discipline:
Focus on undervalued, high-quality blue chip stocks
Consider the primary market trend and economic conditions
Look for stocks with strong dividend growth potential
Be patient and wait for optimal entry points
Holding discipline:
Monitor dividend coverage and payout ratios
Stay informed about company and industry developments
Be prepared to hold through market volatility
Consider adding to positions during market corrections
Selling discipline:
Sell when stocks reach historically overvalued levels
Re-evaluate holdings if fundamental quality deteriorates
Consider tax implications of selling decisions
Avoid emotional reactions to short-term market movements
Developing and adhering to a disciplined approach helps investors make
rational decisions and avoid common pitfalls driven by fear and greed.
8. Use the "Blue Chip Trend Verifier" to
gauge overall market conditions
Whenever the percentage of stocks in the Undervalued
category rises between 70 percent and 80 percent of the
total, it has been coincident with a low cycle in the DJIA
and many good buying opportunities.
Understanding the tool. The Blue Chip Trend Verifier categorizes stocks
into four groups:
1. Undervalued
2. Rising Trend
3. Overvalued
4. Declining Trend
By tracking the percentage of stocks in each category, investors can gain
insights into overall market conditions.
Key indicators:
70-80% of stocks in Undervalued category: Potential market bottom,
excellent buying opportunity
17% or fewer stocks in Undervalued category: Potential market top,
exercise caution
Practical application. Use the Blue Chip Trend Verifier in conjunction with
other market indicators to:
Determine overall market valuation
Identify potential turning points in market trends
Adjust portfolio allocations based on market conditions
This tool provides valuable context for individual stock selection decisions
and can help investors navigate different market environments more
effectively.
9. Defensive stocks provide stability
during economic downturns
Defensive stocks make the most sense right now, so
depending on your risk tolerance, I would allocate between
25 percent and 50 percent of capital, but I would be more
comfortable with 25 percent.
Characteristics of defensive stocks:
Stable earnings and cash flows
Products or services with inelastic demand
Strong balance sheets and consistent dividend payments
Key defensive sectors:
Consumer staples
Healthcare
Utilities
Telecommunications
Benefits of defensive stocks:
Lower volatility during market downturns
Consistent dividend income
Potential for outperformance in bear markets
Incorporating defensive stocks into a portfolio can help reduce overall risk
and provide stability during uncertain economic times. However, investors
should balance defensive positions with growth-oriented stocks to capture
upside potential during market recoveries.
10. Patience and a long-term
perspective are key to successful
dividend investing
Patience, in the stock market, is indeed a virtue.
Value of patience:
Allows time for undervalued stocks to be recognized by the market
Enables investors to benefit from compounding dividends
Reduces the impact of short-term market volatility
Helps avoid emotional decision-making
Long-term focus:
Aligns with the natural cycles of dividend growth
Provides time for quality companies to weather economic storms
Allows investors to benefit from the power of compound returns
Practical strategies:
Set realistic long-term goals and stick to them
Avoid obsessing over day-to-day market movements
Reinvest dividends to accelerate wealth accumulation
Regularly review and rebalance portfolio, but avoid unnecessary
trading
By maintaining patience and a long-term perspective, dividend investors
can maximize their chances of achieving sustainable wealth growth and
meeting their financial objectives.
Last updated: October 2, 2024
Review Summary
3.82 out of 5
Average of 100+ ratings from Goodreads and Amazon.
Dividends Still Don't Lie receives mixed reviews. Readers appreciate
its approach to dividend investing and blue-chip stock valuation
using historical dividend yields. Some find it a useful introduction to
dividend strategies, while others critique its promotional tone for a
newsletter subscription. The book's simplicity is both praised and
criticized, with some finding it easy to understand and others feeling
it lacks depth. Several reviewers note that the specific stock
recommendations may be outdated, and some question the
strategy's long-term effectiveness compared to index investing.
About the Author
Kelley Wright is the author of Dividends Still Don't Lie, a book that
presents a strategy for investing in blue-chip stocks based on
dividend yield analysis. Wright's approach involves buying stocks
when their dividend yields are historically high and selling when
they're low. He emphasizes the importance of long-term dividend
growth and using dividend yield as a valuation metric. Wright's
expertise in dividend investing is evident, though some readers note
that the book serves as a promotion for his newsletter. His writing
style is generally described as clear and accessible, making complex
investment concepts understandable to a broad audience.
