The Daily Workshop
Report
by Robert Sheard
(TMF Sheard)
LEXINGTON, KY. (October 15, 1997)
Scroll to the bottom for year-to-date Growth and Value Screen results.
It's Large-cap Week here in the Foolish Workshop. On Monday, I listed the 100 largest American stocks. Yesterday I summarized the Bits and Bytes Portfolio, a large-cap portfolio of computer and computer-related stocks. Today, we turn our attention to a high-yield approach using these giants. No, it's not the Dow Dividend Approach, but rather, its cousin, Beating the S&P.
Ethan Haskel, a Baltimore cardiologist and long-time Fool better known in Cyberspace as [email protected], decided he liked the Foolish Four approach, but wanted some diversification. One option, of course, is simply to include more of the high-yielding Dow stocks, but as our long-term history shows, doing so sacrifices a healthy chunk of performance returns in exchange for the extra diversification. While the Foolish Four has returned nearly 23% a year since 1971, the High-Yield Ten has returned less than 18%.
Dr. Haskel decided to look elsewhere, using the basic Dow Dividend methodology. In other words, he sought to expand the field to other American large-cap industrials which offered good yields. The companies in the Dow aren't the only large-cap, high-yielding giants in the American market. In fact, because the Dow is limited to 30 stocks, there are a number of larger industrials not represented in the index. Beating the S&P looks to add these stocks so as to complement the Foolish Four without sacrificing performance.
To select the field of thirty stocks, Beating the S&P gets a list of the largest companies in America. From there, it removes the Dow stocks so as not to repeat them. Then Cormend selects the next thirty large-cap dividend-paying industrials, throwing out stocks only if they would over-weight a single industry (such as oil stocks).
At the time he first began developing this approach, Dr. Haskel didn't have electronic access to large-cap screens, so he used the annual rankings published in one of those glossy financial magazines to generate the list of thirty stocks each year. Now that we can screen updated rankings electronically each week if we like, the process has become much easier.
Another way to play this approach is to create your own "index" of thirty or forty stocks. Take the market-cap rankings I provided on Monday, throw out the utilities (I would even exclude the telephone companies) and any stocks that don't pay a dividend and then take the top thirty or forty stocks. Using the list I posted Monday, for example, this would include the following stocks:
General Electric GE Exxon Corp. XON Coca-Cola KO Intel Corp. INTC Merck & Co. MRK Int'l Business Mach. IBM Philip Morris MO Procter & Gamble PG Bristol-Myers Squibb BMY Pfizer Inc. PFE Johnson & Johnson JNJ Wal-Mart Stores WMT Amer. Int'l Group AIG Lilly (Eli) LLY Hewlett-Packard HWP Du Pont DD Citicorp CCI Mobil Corp. MOB PepsiCo Inc. PEP Ford Motor F Chevron Corp. CHV Disney (Walt) DIS BankAmerica Corp. BAC Lucent Technologies LU Boeing BA Chase Manhattan Corp. CMB Abbott Labs. ABT Fannie Mae FNM Gen'l Motors GM Gillette G Amer. Home Products AHP Amoco Corp. AN NationsBank Corp. NB Travelers Group TRV Motorola Inc. MOT Schlumberger Ltd. SLB Schering-Plough SGP Minnesota Mining MMM Amer. Express AXP Home Depot HD
The top ten yielders from this list (as of noon today) are:
Philip Morris MO Ford Motor F Amoco Corp. AN Gen'l Motors GM Mobil Corp. MOB Chevron Corp. CHV Exxon Corp. XON Amer. Home Products AHP Minnesota Mining MMM DuPont DD
Obviously, four oil stocks are too many, so I would probably limit the field to two stocks of the ten from any one industry. So throw out Chevron and Exxon and add in the next two stocks, NationsBank and Chase Manhattan.
Philip Morris MO Ford Motor F Amoco Corp. AN Gen'l Motors GM Mobil Corp. MOB Amer. Home Products AHP Minnesota Mining MMM DuPont DD NationsBank Corp. NB Chase Manhattan Corp. CMB
If you wish to re-rank them by stock price as the Beating the Dow and Beating the S&P models do, the order would be:
Company Name Symbol Price Div Yield Philip Morris MO 41.38 1.60 3.87% Ford Motor F 49.50 1.68 3.39% DuPont DD 58.75 1.26 2.14% NationsBank Corp. NB 63.50 1.32 2.08% Gen'l Motors GM 70.25 2.00 2.85% Amer. Home Products AHP 70.44 1.72 2.44% Mobil Corp. MOB 74.81 2.12 2.83% Amoco Corp. AN 94.38 2.80 2.97% Minnesota Mining MMM 98.44 2.12 2.15% Chase Manhattan Corp. CMB 122.69 2.48 2.02%
There are a number of ways to use the high-yield strategy. As long as you're working with a group of large-cap industrials that pay dividends, you should do pretty well over the long run. Decide which of the many variations is right for you and Fool on!
Tomorrow and Friday we'll look at two large-cap strategies based on earnings and price momentum. Stay tuned.
Monthly Growth Screens (Jan. 3 to present) 94.33% Relative Strength 42.09% Investing for Growth 38.60% EPS Plus RS 30.14% YPEG Potential 29.11% S&P 500 Index 28.88% Unemotional Growth 24.99% Low Price/Sales 24.89% Formula 90 Annual Value Screens (Jan. 1 to present) 28.66% Dow Combo 27.46% Dogs of the Dow 27.31% Unemotional Value 27.31% Beating the Dow 24.96% Dow Jones Ind Avg 24.22% Beating the S&P 20.76% Foolish Four