<THE FOOLISH FOUR>

Dow Dividend Disasters
by Chris Rugaber
(TMF RFK)

Alexandria, VA. (October 1, 1998) -- One of the principal tenets of Dow Dividend Approach investing is the idea that companies of the Dow are big enough to rebound from adversity. But surely some Dow companies, at some point or another, have really tanked? And what about those that have been removed from the Dow 30 Index -- what if you owned them as part of your Fool Four or other Dow Dividend strategy? Aren't there some potential problems there?

Well, looking at some recent examples, not really. Some Dow stocks have tanked. But the Fool Four frequently avoids them. And changes in the Dow haven't previously caused any havoc for the Fool Four investor, either.

It's also worth pointing out that the two are not the same -- not all changes in the Dow are a result of poor performance by the stock removed, and not all stocks removed from the Dow perform poorly prior to their removal. Some are deleted because they have been bought out. Others are ejected simply because the editors of the Wall Street Journal have decided another company needs to be included to better represent the overall market.

Let's look at disaster stocks first. As Michael O'Higgins points out in Beating the Dow, one of the most dramatic and longest lasting declines of a Dow stock was by the Manville Corporation in the early '80s. Manville was the company lucky enough to make asbestos. After it was slammed by a tsunami of lawsuits, it declared bankruptcy and was deleted from the Dow in August of 1982.

Was this a "Dog of the Dow" that Foolish Four investors would have held? Yes and no. According to my handy-dandy Dow Dividend Spreadsheet, available in FoolMart, in 1981 the Fool Four would have included what was then called Johns Manville. Its stock declined 32.5% that year. Ouch! That contributed to the Fool Four's 4.63% loss versus the Dow's drop of 3.26%. Not great, but considering Manville's disaster, not too bad.

In 1982, however, Manville was both the lowest priced and the highest yielding stock, and therefore would not have been included in the Fool Four. So its 21.5% loss would not have been a problem -- in fact, the Fool Four gained 39.5% that year.

Another example O'Higgins mentions is Chrysler <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: C)") else Response.Write("(NYSE: C)") end if %>, which fell on rough times in the late 1970s: its stock nose-dived 17.8% and 25.9% in 1978 and '79, respectively. In both years, it was also the highest yielding and lowest priced stock, which kept it out of the Foolish Four and left Fool Four investors unscathed -- in the end, the Fool Four gained almost 10% both years.

Moving on from disaster stocks, stocks that were removed from the Dow index haven't caused Fool Four investors much heartburn either. First, other than the examples above, most recent removals didn't do too badly in the year or so before they left. Secondly, few were included in any Dow Dividend strategies.

For example, last year Woolworth -- now known as Venator <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: Z)") else Response.Write("(NYSE: Z)") end if %> -- and Bethlehem Steel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BS)") else Response.Write("(NYSE: BS)") end if %> were replaced by Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> and Wal Mart Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %>, but neither Woolworth nor Bethlehem Steel were part of the Fool Four strategy. And of the three companies deleted in 1991 -- Navistar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NAV)") else Response.Write("(NYSE: NAV)") end if %>, Primerica [now Travelers Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRV)") else Response.Write("(NYSE: TRV)") end if %>], and USX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: X)") else Response.Write("(NYSE: X)") end if %> -- only USX was in the High-Yield 10, at 10th place. It gained 92.2% that year, by the way. Companies replaced in 1976, 1985, and 1987 also did not have disastrous years before they left and were not Fool Four stocks.

These examples demonstrate that even companies that really do go down for the count, like Manville, or close to it, like Chrysler, don't ruin Fool Four investors -- and companies removed from the index are not major causes for concern, either. But these are just a few examples. A more systematic evaluation would be useful as well. Exactly how badly have individual Dow stocks performed, and how did they affect the Fool Four? We'll look at 37 years of data on those questions next week.

Current Dow Order | 1998 Dow Returns

What Happened to Robert Sheard?

10/01/98 Close
Stock  Change   Last 
 -------------------- 
 UK   -   1/4   42.88 
 IP   -1  3/4   44.88 
 MO   +   7/16  46.50 
 EK   -2  9/16  74.75 
 
 
                    Day   Month    Year 
         FOOL-4   -1.78%  -1.78%   8.87% 
         DJIA     -2.68%  -2.68%  -3.49% 
         S&P 500  -3.01%  -3.01%   1.64% 
         NASDAQ   -4.81%  -4.81%   2.67% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  206 Eastman Ko    60.56     74.75    23.43% 
  12/31/97  289 Int'l Pape    43.13     44.88     4.06% 
  12/31/97  276 Philip Mor    45.25     46.50     2.76% 
  12/31/97  291 Union Carb    42.94     42.88    -0.15% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  206 Eastman Ko 12475.88  15398.50  $2922.63 
  12/31/97  289 Int'l Pape 12463.13  12968.88   $505.75 
  12/31/97  276 Philip Mor 12489.00  12834.00   $345.00 
  12/31/97  291 Union Carb 12494.81  12476.63   -$18.19 
  
  
                              CASH    $754.73 
                             TOTAL  $54432.73