The Dow Approach
The Dow Approach
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FOOL GLOBAL WIRE LEXINGTON, Kentucky (January 8) -- What started off as a nice rally for stocks and bonds turned south this afternoon. A couple of rounds of program trading dropped the overall market as bonds also turned negative. Why? Got me. Some say it's nervousness about Friday's employment report, the first major economic data of the new year. Others are simply nervous about either a strengthening economy, which could lead to higher interest rates, or a weakening economy, which could hurt corporate earnings. Do you get the idea that Worry Street would be a better name than Wall Street? Our own Foolish Four haven't exactly set the world on fire to begin 1997, but that's not an unusual phenomenon. Remember the theory upon which this approach is based. By starting with a collection of large companies, placed within a culture which values the stock dividend highly, the high-yield rankings we use to cull out our ten Beating the Dow stocks are a relative comparison of how out of favor these stocks are. If a stock's yield is among the highest, it's either the result of a company repaying its owners a very handsome portion of its free cash flow (a very good thing), or the result of a company whose stock has fallen out of favor and should ultimately rebound in time. (As the price drops, assuming the cash dividend is unchanged, the yield for the stock rises.) And buying these out-of-favor blue chips is another very good thing. By focusing on these high-yield stocks, then, we have a very simple relative comparison for bargain hunting. Given that these stocks are blue chip giants, they are all but unsinkable in the long run, and with time they rebound, often with a vengeance, which is what produces the stellar returns the Dow Approach has recorded for decades. But when one first purchases the group of high yielders, there's no guarantee that they'll immediately start recording sweet gains. They can get "doggier" before the grooming makes them attractive again. Often in the early part of the yearly holding period, you might see a lack of performance. But as the year progresses and these stocks have some time to rebound from whatever pushed them into the group in the first place, the gains can come fast and dramatically. So even if we get to the middle of the year and your new Dow portfolio looks, well, anemic, don't despair. It's not unusual, and those who are patient and disciplined often get repaid handsomely for their restraint. Foolishness is a must! The Wise won't bother with such a boring juggernaut. |
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