Try to forget about


10,000 for a minute. (C'mon, try. It won't hurt.) Instead, wrap your brain around Dow 31,460. Or, for those with even more ambition, try Dow

652,230 on for size.

No, these aren't the sci-fi fantasy forecasts of some market soothsayer or the predictions of


(or even

James Glassman

). Instead, the seemingly unthinkable levels mentioned above are plateaus the

Dow Jones Industrial Average

hit at the end of 1998, according to a recent study by Roger G. Clarke, chairman of

Analytic TSA Global Asset Management

in Los Angeles, and Meir Statman, professor of finance at

Santa Clara University


Clarke and Statman arrived at the seemingly outrageous figures on the Dow by calculating its value as "wealth" index rather than a "capital" index. The distinction is fairly simple: A wealth index incorporates reinvested dividends while a capital index (as the Dow currently is) does not.

"Cash dividends do not reduce the wealth of DJIA investors," the report states. "Yet the DJIA people treat cash dividends as if the money is burned. The DJIA, like the

S&P 500

and all major stock indexes, excludes income. It is an index of capital, not an index of wealth."

Incorporating dividend reinvestments, the Dow ended 1998 at 652,230.87, more than 71 times its widely quoted year-end close of 9181.43, the study said.

Statman concedes he had to "approximate" dividend levels for the report, demonstrating just how far

Dow Jones


is from incorporating dividends into the industrial average.

Regarding whether there's a real possibility the Dow will be recalibrated to include dividend reinvestment, Statman mused, "They adjust for stock splits -- why not dividends?" But he largely deferred to Dow Jones.

John Prestbo, editor of Dow Jones indexes, said "the convention in the index business is to do both -- one is called price return, the other is called total return. They reflect two different perspectives

and you cannot reconcile those two into one."

Prestbo acknowledged Dow Jones has not kept track of dividends for the entire history of the industrial average, noting "total return was not a concept that existed in 1896." Thus, he could not verify the findings in the report. Dow Jones has "regularly" computed total returns back to 1987, he said; the average annual gain for the total return index from 1987-1998 is 15.4% vs. 12.3% for the price return index, according to

The Wall Street Journal

statistics department.

"It would be nice if they could go back and do that," Statman said of Dow Jones' statistical department. "Then you would not have the kind of confusion when

Robert Prechter and

John Rothchild do a Dow Jones adjusted for inflation,

because dividends will be inside."

Inflation Makes the Difference, a Bear Maintains

Prechter, president and CEO of

Elliott Wave International

, is best known for predicting the 1987 market crash, but his apocalyptic view of what would take place thereafter has not materialized. Rothchild is the author of

The Bear Book: Survive and Profit in Ferocious Markets

, which cites Prechter's argument that the Dow adjusted for inflation has produced minimal returns since 1966.

Even incorporating inflation, the Dow ended last year at 31,360.30 when dividend reinvestment is taken into account, an average annual rise of 6.7% from its inception in May 1896, the Clarke-Statman report says.

"People come back to how if you take the Dow and adjust for inflation, it has not moved much. That is silly," Statman said. "Dividends do matter. It is real cash and important it be included. If I had my way, all indexes would be constructed including dividends."

Prechter countered by saying his work was intended to discuss "long-term psychological patterns, not to make any point about dividend reinvestment." Additionally, the Clarke-Statman report leaves out two "critically important" issues, he said. One, "cash pays a return also

and probably if you looked at the last 10 years, cash might have outperformed dividends," he said. Secondly, "it costs money to get in and out of stocks so if you're doing any investing at all, then it really can wipe out the dividend effect."

Moreover, the ever-bearish newsletter writer said: "It's easy to make these types of arguments when everything is fine. Do you recall any academic studies in 1974 or 1982 that explained why stocks were a great value? Now that the market is at its most overvalued level in the history of Western finance, academics are trying to bring studies out as fast as they can and the end result -- intended or not -- convinces people to buy more stocks. I think that is begging people to take unconscionable risk."

As for what practical insights investors can glean from the study, Statman's answer was two-fold.

First, "the fascination with 10,000 is highly exaggerated," he said. "All of those numbers are quite arbitrary and all indexes are arbitrary. The Dow is more arbitrary than most, or all, because it is constructed in such a screwy fashion."

Second, the study shows the power of dividends, something many investors seem to have lost track of in the 1990s. Reflecting on how attitudes have changed, Statman recalled

Con Edison's

(ED) - Get Report

cutting its dividend during the energy crisis of the 1970s and how "the shareholders were ready to hang the chairman. Many were elderly people who looked at dividends as the equivalent of Social Security."

By contrast, today's investors "don't care about dividends," he said. "But all money is green. I don't care whether you give it to me in the form of dividends or capital gains. People think they like dividends or capital gains. I like them equally."

As originally published, this story contained an error. Please see Corrections and Clarifications