Dow Dividend Strategy Historical Returns
Some things you should know about the returns shown in the table
- The returns shown are the compound annual returns for the
period 1972-2019, a total of 48 years.
- The Std. Dev. column is the standard deviation of the 48 annual
returns. No claim is made that these are "normally distributed."
However, higher standard deviations indicate greater variability
in the annual returns.
- The returns are based on PRICE CHANGES ONLY. Dividends are
not included. This is different from the results presented by
many others. I did this mainly as a matter of convenience, but
there are other reasons to exclude the dividends. Historically,
dividends have accounted for about half the return from investments
in common stocks. However, in recent years, this has not been
the case. Due to tax laws and other considerations, many companies
have decided not to increase their dividends in line with increases
in earnings. Instead, some companies will purchase their own shares
in the market, which is an alternative method of distributing
profits to shareholders. Until this general dividend
policy changes, focusing
on capital gains, which is the change in price, seems to be a
better way to evaluate strategies in the current environment.
- The analysis below, and those presented by other sources,
ignore commissions. This is another reason not to include dividends
in the calculations. One could say that the dividends will pay
the commissions. However, with the advent of deep, deep discount
brokers, it is possible that most investors' can pay commissions
that are far less than the dividends received, even when dividend
levels are low.
- Tax consequences are not included since they vary by investors.
- Any spin-offs or distributions, such as MMM's spin-off of
Imation in 1996, are treated by assuming that the shares received
are held until the end of the year and sold then. In cases when
there have been special large cash dividends, these dividends
are added to the price of the stock at the end of the year.
- With the exception of the "Foolish Four," it is
assumed that an equal dollar amount is put into each stock in
the strategy using the closing prices on the last day of the year.
Returns are based on the closing prices on the last day of the
following year. As a practical matter, most investors will not
be able to make exactly equal investments in each stock.
The strategies in the table are:
For comparison purposes, the same information is shown for the
Dow Jones Industrial Average (DJIA) and the Standard and Poors
500 Average (S&P 500).
- BTD5: (Beat the Dow 5) - The O'Higgins and Downes strategy
of buying the five lowest priced of the ten highest yielding Dow
- High10: Buy the ten highest yielding stocks in the
- High5: Buy the five highest yielding stocks.
- PPP: (Penultimate Profit Prospect) - Buy only the second
lowest priced stock in the High10 list.
- MF4: (Motley Fool's "Foolish Four") - Buy
two lots of the PPP (40%) and 20% each of the third through fifth
lowest priced stocks in the High10 list.
- LY: (Last Year) - Buy the last year's BTD5 stocks.
For example, for 2008, buy the stocks on the BTD5 list for 2007.
- 2YR: (Two year combined) - Buy the stocks that are
on this year's or last year's BTD5 lists. Since 2 or 3 stocks
normally stay on the list from year to year, this will usually
be 7 or 8 stocks. Execution of this strategy will likely require
some rebalancing by buying or selling some shares of the stocks
that are on the LY list.
Annual returns for the strategies and
indexes shown in another table.
Strategy Return Std. Dev. Best Worst
BTD 9.7% 18.9% 60.8% -51.5%
High10 8.4% 15.9% 48.1% -41.6%
High5 7.9% 18.7% 61.2% -48.8%
PPP 5.7% 43.7% 183.4% -87.1%
MF4 9.2% 24.9% 88.4% -64.5%
LY 9.3% 19.1% 60.9% -43.9%
2YR 9.7% 18.7% 52.2% -49.8%
DJIA 7.5% 15.8% 38.3% -33.8%
S&P 500 7.5% 16.6% 34.1% -38.5%
From the data in the table above, it is evident that strategies based
solely on yield are less desirable as a rule than the others.
The High10 strategy does have the advantage of being the least
variable and having the worst year with the smallest loss. The
High5 strategy does not seem to have any advantages. The MF4 strategy
of the Gardners is clever in that it is doing better than the PPP,
but due to the 87.1% loss of PPP GM in 2008, it is no longer as
attractive as the BTD and 2YR strategies
2008 shows that regardless of one's choice of strategy, there are
great dangers, which may not be evident from historical data, in
owning stocks during a severe bear market. The annual returns table
linked above shows that all of the
strategies and the two indices had their worst years by a large
margin in the past 45. (The Nasdaq Composite, not shown above, dates
back to 1971 and had its worst year ever. The Dow and S&P had their
worst years since 1931.) None of the strategies performed as well as
the Dow and S&P that year, so no investor sticking with any of the
strategies would be pleased by what happened in 2008.
Note that all of the strategies except for the PPP shown have had a
higher average returns than
the Dow or S&P. Moreover, except for the PPP, until 2008 the worst year with any
of the strategies was not as bad as the worst year experienced by the
two averages. The larger standard deviations of the strategies (except
for High10) is mainly due to the superior returns. In this case,
greater variability does not mean greater risk, with the exception of
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