Dow Strategies Current Year Returns

I have decided to stop tracking the Dow Dividend Strategies for the time being. That may be the ultimate signal that this approach is going to start working again. However, I have my doubts. It is more than the fact that these strategies have performed so poorly after 1993. Investing approaches go in and out of favor, so several years of disappointing performance is not a sufficient reason by itself to stop using a strategy. One needs to know what has changed that makes it likely that the strategy will not live up to its historical performance.

At least two things have changed, and both affect the number of stocks that have the potential to participate in the Dow Dividend Strategies. One is that dividends are much lower than they used to be because most corporations no longer feel that the best way to use profits is to distribute a healthy share of them to shareholders in the form of dividends. Some of the reasons are the double taxation of dividends, a desire to reinvest profits to produce future growth, and the feeling that share buybacks are better way to distribute some profits to those shareholders who want them and increase earnings per share by decreasing the number of shares outstanding.

The second reason is bringing younger faster growing companies such as Microsoft, Intel, Wal-Mart, and Home Depot into the Dow. These companies have never had a tradition of paying substantial dividends. Microsoft, despite being the largest company ever in terms of market value and despite being enormously profitable and having a large hoard of cash, does not pay any dividend at all. (That was true when this page was first posted, but now the company does have a very small annual dividend. It also paid a large one-time special dividend in late 2004, but that would not affect any of the dividend strategies.)

Consequently a relatively few stocks are making the lists of the yield-based strategies year after year. The lists, particularly the ten highest yielders, just do not change that much from year to year except when higher yielding stocks are removed from the Dow as in 1997 and 1999. That means these strategies are no longer selecting from the broad spectrum of the economy represented by the Dow as a whole, but from a much narrower subgroup of the Dow. This is discussed in a January 3, 2000 article in Barron's. Harvey Knowles, who co-authored one of the early books about the Dow Dividend Strategies, points out that in the 1960s, 25 of the 30 Dow stocks (there were no changes in the composition that decade) were in the ten highest yielding lists at least once. Now the diversity in those lists is not nearly as broad.

The article suggests the solution to this problem is picking high-yielding stocks from a "wider universe than the Dow." That is probably a good idea. The Motley Fool website (see the link below) has calculators that will enable you to do this. If you determine your own universe of good candidates for dividend strategies, it is not that difficult to set up a quote file on Yahoo! (portfolios of up to 200 ticker symbols may be defined) and import the data into a spreadsheet to perform the needed calculations and rankings.

Another solution, which is not discussed in the article, is to use different methods for selecting among the stocks in the Dow. Since these strategies are somewhat contrarian in nature, we would want methods that identify stocks that are currently out of favor. The Motley Fool's current strategy based on the "RP ratio" may be a good answer. That approach still takes dividend yields into account, but it does not rely on them and on price levels to the same extent as the other yield-based strategies. That strategy has done well since it was adopted by the Motley Fool, so it bears watching in the future.

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