Monday, December 9, 1996
Beating the S&P:
A Decade of Out-Performance
by Cormend

In March I outlined a simple stock-selection system that attempted to equal, or even out-perform, the Dow Dividend Strategy, also known as Beating the Dow (BTD), by using a universe of highly-capitalized stocks other than those in the traditional Dow 30 [See Beating the S&P--A Foolish Alternative?]. I've recently completed nearly 10 years of back-testing of Beating the S&P (BSP), and it's those results I wish to share here.

Total Return Annual Return (Ave.)

S&P 500 305.0% 17.0%

BTD5 396.0% 20.3%

BSP 465.2% 21.2%


The returns by year:

S&P 500 BSP

1987 +4.7% +13.1%
1988 +16.2% +32.1%
1989 +31.4% +25.8%
1990 -3.3% -4.3%
1991 +30.2% +25.5%
1992 +7.4% +3.9%
1993 +9.9% +20.2%
1994 +1.2% +5.6%
1995 +37.5% +40.0%
1996(YTD) +22.5% +35.6%

A few observations:

1) The back-testing is limited to 10 years because the database for choosing the highest-capitalized stocks (Business Week's top 1000) goes back only that far.

2) The BSP variation shown above eliminates the lowest-priced stock of the top ten high-yielders, choosing the next five stocks on the list. For the ten-year time frame tested, the lowest-priced stock (regardless of its yield) was the lowest-performing stock of the six fully half the time.

3) For the S&P 500 returns, I've used the annual returns of the Vanguard Index 500 Fund, which reinvests dividends quarterly. Thus the BSP and BTD returns are penalized slightly because the dividends have not been reinvested until the next year, whereas in real life they could be put to work elsewhere.

4) Although the returns for Beating the S&P seem impressive, any grandiose conclusions should be muted. Ten years is simply too short a time frame to make definitive statements. I prefer instead to view the results as lending further credence to the concept that high-yield investing in large, multinational corporations works and that a portfolio based on the concept has the potential to significantly outperform the S&P 500, if not Beating the Dow, over many years. Although I haven't tested the numbers directly, I'd expect precious few mutual funds have outperformed BSP over the past decade. Furthermore, how many funds will continue to have the same manager in place for the next decade, even assuming continuity of management over the previous one?

So, where exactly might Beating the S&P fit into one's own portfolio? Many investors might like the concept of the Beating the Dow or its myriad variations but feel uncomfortable tying up a large percentage of their portfolio in just four or five stocks. Adding the five BSP stocks might make sense as a complement. Alternatively, one can start with BTD (or a variation) and add those stocks from BSP that complement their BTD portfolio, choosing stocks from different sectors than the BTD stocks, for instance. Some investors, wary that the increasing popularity of BTD might limit future profits (an as-yet-unproven hypothesis), may not want to swim with the crowd and prefer instead to use BSP as an alternative strategy. Still others might want to watch from the sidelines until more long-term results are in. Hey, it's a free country.

For those interested, the five current BSP stocks (as of December 6, 1996) are: Chrysler, SaraLee, Anheuser Busch, Kellogg and Amoco. As is usually the case, data like what I've posted here usually generate more questions than answers. We discuss Beating the S&P and all aspects of high-yield investing in the Beating the Dow message folder right here in Fooldom. Why not stop by and sit for a spell?