The Dow Dividend Approach
Here is a strategy that you may want to consider, one that has historically trounced the market averages and requires only about fifteen minutes a year to implement. The Dow Dividend Approach has roughly doubled the average annual return generated by the market over the last 25 years.
The Dow Approach is based on the Dow Jones Industrial Average (DJIA), the most famous index in the world. In the case of the DJIA, you're measuring the performance of the overall stock market by using a group comprising 30 American multinational conglomerates, companies like General Electric, Disney, and ExxonMobil.
The Dow stocks represent the cream of American big business. The Dow Dividend Approach teaches you to divide up your money in five even lots, select a group of beaten-down DJIA stocks, and buy and hold for one year, playing the likely turnaround.
OK, so how do you use the Dow Dividend Approach? Well the first step is to simply get a list of the 30 DJIA stocks which you can find in sources like Barron's, The Wall Street Journal, and Investors' Business Daily. Then you'll need two numbers for each stock, the stock price and the annual dividend yield. Then rank the 30 stocks by yield, from highest to lowest.
There are three main variations of the Dow Dividend Approach. The first of these, known as the High Yield 10, is simply to buy the top ten yielding stocks from the list (in equal dollar amounts, not equal share amounts) and hold them for one year. After the year is up, update your statistics, sell any of these stocks not still on the top ten list, and replace them with the new highest yielders. Simple enough? For the last 25 years, this approach has compounded at an annual rate of 16.85%, beating most professional money managers soundly. What does that mean in terms of dollars? Well, a $10,000 portfolio would have increased to $490,000 over those 25 years.
The second variation is called the Beating the Dow 5 (or BTD5). In this version, you start with the same ten stocks used for the High Yield 10, but you buy only the five least expensive of the ten. Buying the cheapest of the ten stocks has proven over time to improve the approach's returns without adding undue risk. For the last 25 years, the BTD5 approach has compounded at an annual rate of 19.17%, turning a $10,000 investment 25 years ago into $802,000.
The third variation - popularized by the Motley Fool (www.fool.com) - is known as the Foolish Four. Historically, the cheapest of the group of ten high yielders has proven to be a weak performer for the group, while the second-cheapest stock has been the best performer of the group. This isn't a fluke of nature, but rather a principle based on common sense. The lowest-price stock is often one in real financial trouble, so it drags the historical average down. The next stock in order is rarely in such trouble and its low price gives it the necessary room to rebound impressively.
To take advantage of these historical patterns, the Foolish Four follows the same steps as the BTD5, but then it skips the cheapest stock of the five and doubles the weighting of the second-cheapest. For example, if you're investing $5,000 in the Foolish Four, and the five cheapest stocks are General Electric (GE), General Motors (GM), J.P. Morgan Chase (JPM), DuPont (DD), and Merck (MRK), you would ignore General Electric, invest $2,000 in General Motors, and $1,000 apiece in J.P. Morgan Chase, DuPont, and Merck. Over the last 25 years, the Foolish Four approach has compounded at an annual rate of 22.23%. The $10,000 investment we looked at earlier would have grown to $1.5 million using the Foolish Four.
So if you're convinced that the stock market is the best investment vehicle around, and you want to take the next step in portfolio management beyond a simple index fund, then the Dow Dividend Approach should be for you!
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The Dow Approach is based on the Dow Jones Industrial Average (DJIA), the most famous index in the world. In the case of the DJIA, you're measuring the performance of the overall stock market by using a group comprising 30 American multinational conglomerates, companies like General Electric, Disney, and ExxonMobil.
The Dow stocks represent the cream of American big business. The Dow Dividend Approach teaches you to divide up your money in five even lots, select a group of beaten-down DJIA stocks, and buy and hold for one year, playing the likely turnaround.
OK, so how do you use the Dow Dividend Approach? Well the first step is to simply get a list of the 30 DJIA stocks which you can find in sources like Barron's, The Wall Street Journal, and Investors' Business Daily. Then you'll need two numbers for each stock, the stock price and the annual dividend yield. Then rank the 30 stocks by yield, from highest to lowest.
There are three main variations of the Dow Dividend Approach. The first of these, known as the High Yield 10, is simply to buy the top ten yielding stocks from the list (in equal dollar amounts, not equal share amounts) and hold them for one year. After the year is up, update your statistics, sell any of these stocks not still on the top ten list, and replace them with the new highest yielders. Simple enough? For the last 25 years, this approach has compounded at an annual rate of 16.85%, beating most professional money managers soundly. What does that mean in terms of dollars? Well, a $10,000 portfolio would have increased to $490,000 over those 25 years.
The second variation is called the Beating the Dow 5 (or BTD5). In this version, you start with the same ten stocks used for the High Yield 10, but you buy only the five least expensive of the ten. Buying the cheapest of the ten stocks has proven over time to improve the approach's returns without adding undue risk. For the last 25 years, the BTD5 approach has compounded at an annual rate of 19.17%, turning a $10,000 investment 25 years ago into $802,000.
The third variation - popularized by the Motley Fool (www.fool.com) - is known as the Foolish Four. Historically, the cheapest of the group of ten high yielders has proven to be a weak performer for the group, while the second-cheapest stock has been the best performer of the group. This isn't a fluke of nature, but rather a principle based on common sense. The lowest-price stock is often one in real financial trouble, so it drags the historical average down. The next stock in order is rarely in such trouble and its low price gives it the necessary room to rebound impressively.
To take advantage of these historical patterns, the Foolish Four follows the same steps as the BTD5, but then it skips the cheapest stock of the five and doubles the weighting of the second-cheapest. For example, if you're investing $5,000 in the Foolish Four, and the five cheapest stocks are General Electric (GE), General Motors (GM), J.P. Morgan Chase (JPM), DuPont (DD), and Merck (MRK), you would ignore General Electric, invest $2,000 in General Motors, and $1,000 apiece in J.P. Morgan Chase, DuPont, and Merck. Over the last 25 years, the Foolish Four approach has compounded at an annual rate of 22.23%. The $10,000 investment we looked at earlier would have grown to $1.5 million using the Foolish Four.
So if you're convinced that the stock market is the best investment vehicle around, and you want to take the next step in portfolio management beyond a simple index fund, then the Dow Dividend Approach should be for you!
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posted by Bob Moser at
7:27 PM
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