Play The Dow For Profit With This Simple Strategy

Here is one of the smartest and simplest strategies for someone with at least $10,000 to invest. Buy roughly equal dollar amounts of the 10 highest-yielding stocks among the 30 issues that make up the Dow Jones Industrial Average (DJIA). Then a year later, sell any that have fallen out of the top 10 and replace them with the new high yielders.

The odds of beating the market averages with such a system are mind-blowing. The Dow's 10 top-yielding stocks outpace the overall DJIA more than two years out of every three. And that kind of performance adds up.

True, there will be years when this strategy isn't necessarily going to be a big winner, but nonetheless, discounting brokerage commissions and taxes, this high-yield strategy is worth sticking with.

There are three solid reasons why it usually pays off:

1. Stocks with high yields are often out of favor with investors and therefore cheap. Any good news about the companies can make their share prices zoom.

2. The 30 Dow companies are large and generally have solid balance sheets. By acquiring only such issues, you tend to bypass truly rickety operations.

3. The stocks' high yields automatically deliver nearly half the usual market return. Since the Dow earns 10.9% on average, locking in a 4% to 5% yield gives you a real edge.

This strategy calls for buying all 10 top yielders - no exceptions - based on the previous year's payouts.

Here now are the top 10 dividend paying stocks in the DJIA as of June 30, 2005.

General Motors (GM) ...........................Yield 5.50%
SBC Communications (SBC) ...................... " 5.37
Merck (MRK) ................................... " 4.76
Verizon (VZ) .................................. " 4.61
Altria Group (MO) ............................. " 4.39
J. P. Morgan Chase (JPM) ...................... " 3.81
Citigroup (C) ................................. " 3.71
DuPont (DD) ................................... " 3.16
Pfizer (PFE) .................................. " 2.67
Coca-Cola (KO) ................................ " 2.57

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Now there is also another version of this strategy that plays the 30 DJIA stocks in a slighly different manner. This adaptation excludes both Altria and General Motors. It dismisses General Motors because its erratic dividend history renders it ineffective as a means of signaling timely purchases, especially whenever it has ranked No. 4 or higher on the list. And it also dismisses Altria Group because for more than eight years, Altria has never ranked lower than fourth on the list, thus to use Altria in this strategy would amount to a buy-and-hold approach.

The basic process of this alternate version of the Dow strategy is not as straightforward as the first version cited above. Here, we are told to purchase the top 4 high-yielding Dow stocks - excluding both Altria and General Motors - and then to hold them for a period of 18 months, after which time you would then replace any of the group that has fallen down with higher-yielding stocks.

Either of these two versions can be said to represent an attempt at market timing because buying all of the stocks at once could be viewed as a prediction that the prices of the shares will rise after the purchases are made. But in any event, this is an interesting approach and one that is worthy of further investigation.

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