In this chapter, Tengler outlines a value strategy that she employs successfully, calling it Relative Dividend Yield (RDY).
With the increasing ability to use technology to compare various factors across a whole slew of stock issues in the 1970s, many investment ideas were spawned. Tengler believes RDY to be one that has much in the way of value appeal conceptually, along with a successful track record.
In RDY, a stock's dividend yield is compared to the market on a historical basis. If the stock's dividend yield beats that of the market by 25% or more, and the stock's yield is high on a historical basis (for this particular stock), it becomes an attractive buy. Should the stock rise to a point where the yield drops below the market's yield, it becomes a sell.
Tengler discusses several reasons that this strategy works. Dividends are more consistent than earnings, so while earnings can fluctuate, Tengler argues that dividends offer the best glimpse of management's view of a stable pay-out that the company can maintain for the long-term.
Furthermore, when a company's yield rises as compared to that of the market, it is a sign that it is not favoured by the market. Tengler argues that this is a good time to buy. She cites Coca-Cola and Johnson & Johnson as ideal examples of this in 2001-02.
Finally, Tengler notes that there are times when this strategy doesn't work. For example, if a stock's relative price to the market is uncorrelated with its RDY, Tengler notes that the strategy no longer outperforms.
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