Relative Dividend Yield And Technical Analysis by Thom Hartle
To trade the stock market effectively, you need a plan to pick out the stock that could outperform others. Here's an example of a plan for trading that uses a stock's relative yield to the broad market and technical analysis.
Trading stocks for short-term or long-term investing is similar to playing a very competitive game. To be successful, you have to have a game plan, and the first step in the game plan is to have a decision screen for selecting stocks. The universe of stocks from which you have to choose is very large and you want to narrow down your choices in the savviest way possible.
One method for stock selection was discussed in a book I reviewed in the August 1992 issue of STOCKS &
COMMODITIES titled Relative Dividend Yield by Anthony E. Spare and Nancy C. Tengler. In the book, Spare
and Tengler outlined a method for stock selection. They reasoned that a stock's dividend yield history relative to the yield of the stock market was a reliable method to identify stocks to buy or sell. Stocks with high yields relative to the overall market's yield, such as the yield for the Standard & Poor's 500, are buy candidates. When the yield of the stock fall to historical low levels relative to the S&P 500, the stock should be sold. Simply calculate the ratio of the stock's yield to the S&P 500 yield. The book provided the history of the ratio for a group of stocks. Spare and Tengler's method puts you into stocks when the price of the stock is low and out of the stock when the price of the stock is high. It's the old adage: Buy low, sell high.
Behind this concept for buying a stock was the notion that a company's ability to maintain and increase dividends was taken very seriously by management. Dividend increases were not made unless the company was confident about long-term fundamentals and the industry. This concept seems reasonable as one way to look for stocks that could be profitable opportunities. The relative dividend yield model could be used as an initial screening for stocks. After reading Relative Dividend Yield, I used Barron's "Speaking of dividends" column as one source for identifying companies that may fit the criteria outlined in the book.
But this was not enough; I wanted another step in the process. The second criteria would be, naturally enough, technical analysis. What follows is one example of a trade I made based on these two concepts.