Foolish Four Portfolio
Effects of the New Dow Stocks
Clues from the Dow's history
By
RESTON, VA (OCT. 27, 1999) -- I guess the market isn't that impressed with the prestige of being a Dow stock. Three of the four new Dow stocks (not officially part of the index, yet) lost ground today. Home Depot <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HD)") else Response.Write("(NYSE: HD)") end if %>, Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>, and Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> dropped from one to three percent each.
Exiting retailer Sears <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %> bounced back a bit after yesterday's drubbing, while Chevron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHV)") else Response.Write("(NYSE: CHV)") end if %> and Union Carbide <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %> were up and Goodyear <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GT)") else Response.Write("(NYSE: GT)") end if %> lost another 2%.
SBC Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBC)") else Response.Write("(NYSE: SBC)") end if %> popped up over 5% on reports of strong third-quarter earnings. For a while there, SBC was almost on the Foolish Four. We will have to look into this high-yielding newcomer next week and get to know it a bit better.
The other new Dow stocks are not so strong in the dividend yield department. When I updated Strategy Stocks Live! and ran a list of all the Dow stocks in RP order, Home Depot, Intel, and Microsoft dropped straight to the bottom. I guess that's to be expected. The new companies are supposed to be dynamic, high-growth (relatively speaking) companies, and such companies often pay low dividends relative to their price, if they pay dividends at all.
A number of folks are apparently dismayed over Microsoft's lack of a dividend. It doesn't bother me particularly because there have always been terrific stocks on the Dow that paid very low dividends, close enough to zero that it didn't seem to matter much. Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> pays $0.20 a year on a $52 stock and IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> pays $0.48 a year on a stock that until recently was comfortably over $100. These are terrific companies that have done well outside the Foolish Four.
I took a cruise through our Dow Dividend Spreadsheet looking for companies that didn't pay dividends, but it quickly became obvious that these companies were just not comparable to Microsoft. In the past, all Dow companies have paid dividends when they were picked for the index. Only when a company was in financial hot water and had to discontinue its dividend did we find a 0%-yield situation. I don't think anyone is going to argue that Microsoft belongs in the same category as Bethlehem Steel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BS)") else Response.Write("(NYSE: BS)") end if %>.
Microsoft (and Intel and Home Depot) are much more like the Dow's low-yield stars, such as IBM and Wal-Mart. As we discussed in Shorting The Dow last June, simply turning the Foolish Four on its head doesn't identify stocks that do badly.
Often, a low-yielding stock is low-yielding because it has been growing quickly. After all, if a stock's price doubles and the dividend doesn't change, the yield is cut in half. (Yield = dividend/price.) The correlation has been so strong recently that we investigated whether these low-yield stocks might be a good alternative or supplementary stock strategy, but the phenomenon was too recent to draw any conclusions.
It looks to me like the biggest danger from this change in the Dow's composition is that it might make the Dow harder to beat. These newbies are powerhouse companies. But once again, this is not a new situation. The companies that are removed from the Dow are usually (not always) those that haven't been doing so well, and companies that are added usually represent dynamic, growing sectors of the economy. So, most likely, nothing really different is going on. But I am keeping my eyes, and mind, open.
As for our dear departed stocks, once again let me repeat that there is no need to sell them. There is no clear pattern that emerges from our data. Many stocks that were dropped did quite well after getting the boot. Remember, the Foolish Four strategy buys out-of-favor stocks and holds them, waiting for a turnaround. And remember that the same strategy works for non-Dow stocks as well.
Say, I wonder if any of the Dow rejects might show up on the Beating the S&P list next year? The BSP30 is revised yearly. The selection process excludes any stock that is on the Dow, but once a stock is removed from the Dow it becomes fair game. I wouldn't be surprised to see some of our old friends back with us soon as BSP stocks.
Today is usually Beating the S&P day. Ethan Haskel is taking a few days off so I grabbed his spot to continue our Dow Switch discussion, but we will have BSP numbers for you next week.
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