Dividends Still Don't Lie: The Truth About Investing in Blue Chip Stocks and Winning in the Stock Market

Chapter 6. Value and the Stock Market

To know values is to know the meaning of the market.

—Charles Dow

Long-time radio commentator Paul Harvey is credited with saying, "In times like these, it helps to recall that there have always been times like these." Although a little on the folksy side, Mr. Harvey does a pretty good job of hitting the nail on the head. Business, the economy, and the markets move in cycles, not in straight lines.

Investor sentiment is subject to cycles as well. When all is well in the financial world, no amount of bad news can drag the markets down. When sentiment falls, no amount of good news can move the markets higher. Intellectually, experienced investors should understand this. Emotional extremes are part of the natural order and thus are necessary, but they are also short-lived.

Cycles have a rhythm and a pattern, much like the seasons: Winter follows fall and spring follows winter, and so forth. In similar fashion, recessions follow boom times and bull markets lead into bear markets. Through it all, the world keeps spinning on its axis.

According to the Dividend-Yield Theory, just as dividend-yield extremes represent historically repetitive areas of undervalue and overvalue in individual stocks, so, too, are there dividend-yield extremes that represent historically repetitive areas of undervalue and overvalue in the stock market.

Indeed, both the Dow Jones Industrial and Utility Averages have long established Profiles of Value, which can provide investors ...