The Dow Approach
The Dow Approach
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FOOL GLOBAL WIRE LEXINGTON, KY. (January 20) -- Wow, can I create confusion or what? Friday I wrote about the recent volatility in the Beating the Dow order because there are so many stocks clumped around the final spot on the High Yield Top Ten list. As you know, all of our Dow Approach models begin with the ten highest yielding Dow stocks, and then re-rank them by price. So if there are frequent changes in that #10 yield slot, the whole rankings get shaken up. And on Friday, Goodyear Tire <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GT)") else Response.Write("(NYSE: GT)") end if %> replaced DuPont <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %> as the #10 yielding stock, or so I thought anyway. What I didn't know at the time I wrote my report is that Eastman Kodak <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> raised its dividend in the past week from 40 cents a share to 44 cents. This was just enough of a jump in yield that Kodak leapt back into the top ten, expelling not only DuPont, but Goodyear as well. But today's action reversed all of those shifts and the order is right back where it was about a week ago, with DuPont as the tenth highest yielder. Right now there are five stocks crowded around that final spot on the high-yield list, all within hundredths of a percentage point in yield: Kodak, Goodyear, DuPont, Caterpillar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %>, and even General Electric <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %>. So on any given day, the entire Beating the Dow order can get mangled. Don't let this be a cause for concern, though. I'm pretty much a stick-to-the-numbers kind of investor and with this approach, it's not only the easiest way to go, but also the most Foolish. There's no sense in agonizing over daily switches in the order. The Dow Approach doesn't pretend to pick the very best four stocks every year. What it does, however, is pick stocks that over time typically outperform the overall field of 30 stocks consistently and significantly. Last year, for example, none of the Dow Dividend approaches picked Woolworth <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: Z)") else Response.Write("(NYSE: Z)") end if %> since the company suspended its dividend, and yet the stock soared nearly 70%. But that doesn't make the approach a failure. The goal isn't for it to be perfect and pick the very best performers every year. That would be a ridiculous expectation. But as MF Sandy has pointed out on several occasions, one can do very well with the Dow stocks simply by avoiding the majority of the ten worst stocks each year. The high-yield (and low-price) approach of the Foolish Four (or Beating the Dow or Unemotional Value or the Dogs of the Dow) does just that the vast majority of the time. As always, though, check the yield and price numbers yourself when you invest. I'm likely to miss new dividend announcements for a day or two until they appear in my newspapers, or until a reader gives me a heads up. And occasionally, as with Kodak this week, those announcements can affect the approach's rankings. So, refer to the information we post, certainly, but verify it when you're making important investment decisions. Anything less isn't Foolish. |
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