Foolish Four Portfolio
The Dow Bulks Up
A Beating the S&P Perspective

By Ethan Haskel (TMF Cormend)

BALTIMORE, MD (Nov. 3, 1999) -- There's certainly been a lot of brouhaha brewing about the recent changes made in the composition of our beloved 30 Dow stocks. We here at Foolish Four Central have been furiously working overtime trying to put these changes in perspective. Sleepless, fretful nights give way to daytime obsessions in which "SBC Communications" keeps playing over and over and over in our minds. SBC, SBC, SBC....

Actually, not.

But we have been thinking about these changes kind of a lot.

In case you missed it, Dow Jones & Co. replaced four of the stocks in the Dow 30, saying good-bye to Depression-era stalwarts Chevron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHV)") else Response.Write("(NYSE: CHV)") end if %>, Goodyear Tire <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GT)") else Response.Write("(NYSE: GT)") end if %>, Sears <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %>, and Union Carbide <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %>. The substitutes include 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 %>, Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>, and SBC Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBC)") else Response.Write("(NYSE: SBC)") end if %>.

It's as if our dowdy Dow was given a jolt of anabolic steroids. Pee Wee Herman walks into the phone booth, and out comes Arnold Schwarzenegger.

What are the long-term implications as the Dow gradually replaces old-economy, industrial companies with those promising the potential for higher growth?

Certainly one effect we've noticed is that the four Dow newcomers don't have anywhere near the dividend yield as that of our old friends. As of Monday, the average yield for the newbies is a measly 0.55% versus 2.62% for our golden oldies. The average yield for both the Dow as a whole and our 10 highest-yielding Dow stocks dropped by about 0.3%.

Does this change represent the death knell for the Foolish Four? Should we all jump ship, sell our Sears, Goodyear, or JP Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> and place buy orders for Rule Breaker stocks EBay <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EBAY)") else Response.Write("(Nasdaq: EBAY)") end if %> or Starbucks <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SBUX)") else Response.Write("(Nasdaq: SBUX)") end if %>?

To help answer this question, let's list a few stocks, along with their current dividend yields (as of Monday). What do these stocks have in common?

Motorola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %>               0.47%
Monsanto <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTC)") else Response.Write("(NYSE: MTC)") end if %>               0.32% 
Time Warner <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TWX)") else Response.Write("(NYSE: TWX)") end if %>            0.26%
Gap, The <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %>               0.25%
Home Depot <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HD)") else Response.Write("(NYSE: HD)") end if %>              0.21%
American Int'l Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIG)") else Response.Write("(NYSE: AIG)") end if %>   0.20%
Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXN)") else Response.Write("(NYSE: TXN)") end if %>      0.20%
Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>               0.16%
Tyco International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TYC)") else Response.Write("(NYSE: TYC)") end if %>     0.14%
Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %>     0.12%
Waste Management <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMI)") else Response.Write("(NYSE: WMI)") end if %>       0.11%
The astute among us have noticed that these stocks actually have two common characteristics. The most obvious similarity is that all these stocks pay relatively low dividends. These muscle-bound Schwarzeneggers seem downright Pee Wee when it comes to distributing their extra cash to stockholders.

Perhaps less apparent is that all these stocks belong to the current Beating the S&P stocks, from which our higher-yielding BSP stocks are chosen. (For a full list of the BSP 30 stocks, click here).

The BSP 30 stocks, year in and year out, have had a significant number of low-yielding stocks, just like those above. In fact, many of these stocks have been perennial members of our BSP club. American International Group was a charter member since the first year backtesting data became available, in 1987. Waste Management joined a year later.

Here are some more numbers:
             Average Annual Return
           since 1987     since 1994
BSP          25.0%          33.1%
S&P 500      17.4%          22.2%
I submit BSP as "Exhibit A" for the defense that a slightly lower-yielding group of 30 Dow stocks can continue to outpace the markets going forward. For every high-tech, high-flying Lucent, we still have a Schlumberger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %>, which entered the portfolio when oil prices were depressed. This oil service giant's stock is ahead 30% this year. Or a Ford <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %>, up 70% last year. Or a Kellogg <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: K)") else Response.Write("(NYSE: K)") end if %>, gaining 54% the year before.

As long as we find market-leading companies and invest in them when they're temporarily depressed -- as indicated by their high yield relative to other market-leading companies -- we should do just fine. There, that should put our Foolish minds to rest.

Hmmm....

SBC, SBC, SBC, SBC....
Beating the S&P year-to-date returns (as of 11-02-99):

Schlumberger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %>      +30.3%
Kimberly-Clark <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMB)") else Response.Write("(NYSE: KMB)") end if %>    +15.4%
Campbell Soup <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPB)") else Response.Write("(NYSE: CPB)") end if %>     -15.5%
Ford Motor Co.  <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %>      -4.1%
Bank of America  <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %>   +9.1%
Beating the S&P                +7.0%
Standard & Poor's 500 Index    +9.6%


Compound Annual Growth Rate from 1-2-87:
Beating the S&P               +25.0%
S&P 500                       +17.4%


$10,000 invested on 1-2-87 now equals:
Beating the S&P             $175,600
S&P 500                      $78,000

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