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The Daily Dow LEXINGTON, KY. (July 30): While a good day for the market, there was very little specific new on the Dow stocks we follow. The notable exception is that Chevron announced a quarterly dividend increase from $0.50 per share to $0.54. Already among the high yielders, Chevron solidifies its spot on the list with the dividend boost.
I mentioned yesterday that today's Fribble would focus on a new Dow variation, and since today's a light news day, I've decided to include the text in today's write-up here as well. After today, the piece's permanent home is in the Fribbles area if you need to find it again. Fool on!
Another Dow Acronym?
Just what we need, I hear you cry, another acronym to clutter the Beating the Dow (sorry ... BTD) folder. We've got the PPP (Penultimate Profit Prospect), the UPP (Ultimate yadda yadda), the basic HY (High Yield), the more recent FF (Foolish Four, the artist formerly known as BTD4x2). And in the near future we'll have Bob Price's RP approach. (The RP can stand for any number of things, details to be announced at a major press conference hosted by Dave Barry.)
Well, Fools, it's time for another one. An element of the Foolish Four which has always bothered me is the fact that we automatically drop the cheapest stock of the ten high yielders. In theory, of course, that stock (the UPP) should be the best performer, but over decades, it has been anything but the best. In many years, that stocks has been a real bowser. But it's inconsistent. One year it's a wonder and then the next it might be a disaster. So, the long-term average suggests that we're better off skipping it.
Maybe not! Going back over MF Templar's database from 1961-1995, one factor popped out at me regarding the cheapest stock. In the majority of years where the stock was a big loser (the very years that prompted us to skip it in the first place), not only was the stock the cheapest of the ten, but it was also the single highest yielder.
With the relationship between price and yield so crucial, it's no wonder that a stock that's in real trouble will have an extraordinarily high yield. (When a stock price craters, the yield soars.) More than just the typical beaten-down stock which Beating the Dow points out as a bargain, some of these stocks are in desperate times, and the very high yield and very low price can be a tip-off.
So, what do we do about it?
Quite simply, don't dismiss the #1 stock out of hand. I ran test numbers going back to 1961 using a 2-stock approach (as a comparison to the much-vaunted PPP 1-stock approach) where I ranked the stocks in typical Beating the Dow order.
If the #1 stock (the cheapest) was also the highest yielding of the ten, I excluded it and took #2 and #3. If the #1 stock was not the highest-yielding stock of the ten, I included it and the #2 stock.
How did such an approach do? It clobbered the PPP approach! Putting $50,000 into the PPP approach in 1961 would have yielded a portfolio worth $11.3 million at the end of 1995 (excluding taxes and commissions). The same $50,000 in my two-stock approach grew to $41.4 million!
Over the last 35 years, then, the PPP has compounded at a rate of 16.74% while my two-stock approach has compounded at 21.16%. If you ignore the 1960s, accepting Michael O'Higgins' contention that changes in market rules in the early 1970s made the approach more effective, the returns are even more impressive. The PPP compounded at 23.36% for the last 25 years while my two-stock approach grew at an annual rate of 25.44%. The ironic fact is that 1995, a wonderful year for the market overall, was dreadful for this approach, which posted only a 4% gain and really dragged down the average.
So should everyone run out and buy a two-stock portfolio? Of course not. But as an option to the various Dow strategies we've been following, this might provide an improvement to the current method of doubling up on the PPP stock and ignoring the UPP stock. You might still buy four stocks, but double the weighting of these two.
Now we just have to name the approach. How about F2 (Foolish 2)? Or the DD (the Dynamic Duo, since the two aren't always the same)? But then we might confuse it with DuPont. Oh well, the marketing department (aka the message boards) will take care of what to call it. I just call it a gem.
Transmitted: 7/31/96
Today's Dow Numbers THE FOOLISH FOUR MODEL (7/31/96) |
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