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 1998 prices to the prices at the close of last month. The first ten stocks are the ten highest yielding stocks at the end of 1998 sorted by increasing price. International Paper is shown because it is involved in the strategies that use 1998's BTD stocks. The price and yield at the end of 1998 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, 1998 Change as Used in strategy (indicated by X): Stock Price Yield of 12/31/99 BTD5 High10 MF4 UV4 LY 2YR
Caterpillar 46.00 2.6% 2.3% X X X X Goodyear 50.44 2.4% -44.4% X X XX X X DuPont 53.06 2.6% 24.1% X X X X X X Phil Morr 53.50 3.3% -57.0% X X X X X X Minn M&M 71.13 3.1% 37.6% X X X X Gen Motors* 71.56 2.8% 16.2% X X X East Kodak 72.00 2.4% -8.0% X X X Exxon 73.13 2.2% 10.2% X Chevron 82.94 2.9% 4.4% X Morgan JP 105.06 3.8% 20.5% X *GM includes 0.69893 share of Delphi Automotive (DPH) spun-off in May
Intl Paper 44.81 2.2% 25.9% X X
Strategy Result as of 12/31/99: -7.5% 0.7% -16.8% -18.8% 0.4% -0.3% [ BTD5 High10 MF4 UV4 LY 2YR ] DJIA change as of 12/31/99: 25.2% S&P 500 change as of 12/31/99: 19.5%
Four stocks left the Dow as of November 1: Chevron, Goodyear, Sears, and Union Carbide, and the first two are in the list above. However, the 1999 strategies are not affected by changes in the Dow that happen after the year begins. Goodyear will also be part of the LY and 2YR strategies for 2000 although it is no longer in the Dow.
Once again, 1999 was not a good year for these strategies. In fact, it was the worst year overall since 1990. The strategies were pulled down by Phillip Morris and Goodyear. With the exception of MMM, none of the stocks really did better than the Dow for the year. A few did better than the S&P 500.
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, which should improve results until the popularity is regained.
However, with the turnover of eight stocks in 1997-99, the Dow has changed significantly. The trend has been to remove relatively high yielding stocks and replace them with stocks with small yields. One consequence, is that there are fewer serious candidates for the dividend based strategies, so the number of Dow stocks that have a reasonable chance of being in the strategies is much less than it used to be. This concept is discussed further in the Jan. 3, 2000 issue of Barron's. It may shed some light on why the strategies have not worked for several years and may also be a good reason to consider not following them.
As mentioned above, the Motley Fool changed their preferred method to the "RP ratio" method. For 1999, the four stocks included are Caterpillar, J.P. Morgan, MMM, and DuPont. For 1999 these stocks were up an average of about 21%, which is much better than any of the strategies shown above and the S&P, but a bit below the Dow. These four stocks contain the three of the best in the list above, and none was a loser so far this year, so one has to be impressed at this point. Time will tell if they really have found an improvement or are doing better because the new method does not include Phillip Morris. That stock had the highest RP ratio, and the stock with the highest ratio is eliminated from the portfolio.
The top five Dow stocks (of the 30 at the start of the year) for 1999 were: Alcoa (+122.6), Wal-Mart (+69.8%), Citigroup (+68.1%), Hewlett-Packard (+66.5%), and American Express (+62.2%). These rankings in conjunction with the underperformance of the dividend based strategies show that so-called "value" stocks have been underperforming so-called "growth" stocks for several years although that has changed somewhat this year. Sooner or later (I wish I knew when!), this relationship will reverse. Investors have the choice of trying to figure out which category is going to be the superior performer or maintaining allocations roughly in line with target percentages they have established. It is not clear that either approach is superior over the longer term. What is likely to be more important to individual investors is realizing which approach is being followed and why, and then acting accordingly.
Given what happened in 1998 and at times in 1999, 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 in the sense that investment returns are improved.
A second purpose of market timing is reducing risk by avoiding some periods when you lose money. This is easier to do, but the "price" usually is lower longer term investment returns. This may be a reasonable trade-off for some investors because a) they won't stick to their investment strategies once they experience a certain level of losses, or b) they may need to cash in and use their equity investments before the market has sufficient time to regain the short-term losses.