The table shows the return as of the end of last month for each of the stocks involved in the Dow Dividend strategies shown. These returns are the percent changes from the closing 1997 prices to the prices at the close of last month. The ten stocks are the ten highest yielding stocks at the end of 1997 sorted by increasing price. The price and yield at the end of 1997 are also shown. The columns of Xs show which stocks are used in which strategies. The return for each strategy is shown at the bottom of the column. For comparison, the returns for the Dow Jones Industrial Average and the S&P 500 are also shown. All returns are price changes only and exclude dividends. With the exception of MF4, the strategy returns are the average return for the stocks in the strategy. This is equivalent to assuming that an equal dollar amount was invested in each stock used for the particular strategy.
The strategies in the table are:
Dec 31, 1997 Change as Used in strategy (indicated by X): Stock Price Yield of 12/31/98 BTD5 High10 PPP MF4 LY 2YR
Intl Paper 43.13 2.3% 3.9% X X X X Phil Morr 45.25 3.5% 18.2% X X X XX X DuPont 60.06 2.1% -11.7% X X X X East Kodak 60.56 2.9% 18.9% X X X X Gen Motors 60.75 3.3% 17.8% X X X X X Exxon 61.19 2.7% 19.5% X AT&T 61.31 2.2% 23.5% X X X Chevron 77.00 3.0% 7.7% X X X Minn M&M 82.06 2.6% -13.3% X X X Morgan JP 112.88 3.4% -6.9% X
Strategy Result as of 12/31/98: 9.4% 7.8% 18.2% 12.3% 7.9% 8.1% [ BTD5 High10 PPP MF4 LY 2YR ] DJIA change as of 12/31/98: 16.1% S&P 500 change as of 12/31/98: 26.7%
1998 turned out to be another very good year for stocks, particularly for the S&P 500 index and the Nasdaq, which was up 39.6%. The incredible gains in high technology and Internet related stocks fueled the growth of these two indexes. The Dow, which does not contain the fastest rising technolgy leaders such as Microsoft and Intel (which are prominent members of the S&P 500), had healthy, but lesser gains.
The Dow Dividend strategies, with one exception, trailed the indices. The exception was the PPP--Phillip Morris--beating the Dow after a slow start. Five of the ten stocks in the table did better than the Dow, but none did as well as the S&P. However, three of the ten lost money in 1998, and the other two showed mediocre gains for the year. Except for the PPP, which consists on just one stock, none of the strategies shown was able to avoid holding a poor performing stock.
The last year when these strategies did significantly better than the market averages was 1993. See annual returns for details. In the five years since, the strategies have either been about the same as the averages or considerably worse, as has been the case for the last two years. The question naturally arises of whether the Dow dividend method is no longer valid, perhaps because it has received too much publicity and too many investors are following it. This is a question that is almost impossible to answer. Instead, one should ask whether the method, its objectives, the type of stocks purchased, and the anticipated risk levels are appropriate for inclusion in one's portfolio. If the answer is yes, then stick to one of the strategies. If the answer is no, then use a different approach. Moving from one hot strategy to another is usually a recipe for disappointing investment results. No approach is going to beat the market all the time, particularly on a risk-adjusted basis, and it is virtually impossible to tell which approach is going to work well over the next year. One should not change approaches unless either a) the approach is no longer suitable for the particular investor, or b) a similar and clearly superior approach for the same portion of the portfolio becomes available. If the recent disappointing performance of the Dow dividend approach is a result of being too popular, then the popularity is quite likely to decrease in the future, whcih should improve results until the popularity is regained.
Interestingly, during 1998, the Motley Fool has changed the "Foolish Four" from the MF4 shown above to the so-called "Unemotional Value Four" (UV4), an approach developed by former "MF Dowman" Robert Sheard, who has written a book about his methods. The UV4 calls for buying equal amounts of the four lowest priced of the ten highest yielding Dow stocks unless the lowest priced has the highest dividend yield. In that case, substitute the fifth lowest priced stock for the lowest priced. Elsewhere on this site, I remark that the elimination of the lowest priced stock seems a bit contrived, but it does have the logic that this company sometimes is troubled and should be avoided. Staying away from the lowest priced stock only when it has the highest dividend yield is even more contrived and results from eliminating a few years when such a stock performed poorly. I am not a fan of this type of approach to developing investment strategies. The more rules added to work around poor performance, the less likely the method is to work well in the future.
For what it is worth, the UV4 for 1998 is the first four stocks listed above, and through October its performance is up 7.3%, which did not do as well as the MF4, which it replaced. Perhaps for this reason, the Fool has changed strategies again for 1999. The new foolish four is the so-called "RP ranking" method. It is more complicated than I wish to discuss here, so visit their site (www.fool.com) for more information.
Given what happened in 1998, it is tempting to try to "time the market" and get out when things look risky (as they often do), avoid the drops, and get back in when the market starts rising again. This is very easy to do in hindsight and very difficult to do in real time. Most investors get carried away in the frenzied atmosphere and tend to buy when the market is making new highs out of fear of missing out and then tend to sell when the market is near the bottom out of fear that it will go much lower. Unless you are one of the very few who can both act unemotionally and call most of the market turns accurately, the wise course is to stick to your chosen strategies for several years and then decide whether a change is appropriate for you.
As a simplified illustration of how hard it is to time the market, assume that you are 70% accurate calling market turns. If you are in the market, two calls are required: a sell and a subsequent buy. The probability of being correct (buying back in at a lower price than your selling price) is 70% times 70%, or 49%. That shows you have to be very good (and most people are not much better than a coin toss) to be successful at market timing.