By Ethan Haskel (TMF Cormend)
March 29, 2000

The magnolias blossom. My front lawn is having the horticultural equivalent of a really bad hair day. We inflate the dusty basketball in the garage. The histamines explode within our mucus membranes. It's springtime in Maryland. To everything there is a season.

Of course, it wouldn't truly be spring without a new Beating the S&P (BSP) stock list. Last week we announced the new BSP 30 stocks, based on the recent publication of the Business Week Top Companies of the S&P 500 list. The BSP 30 is the list from which the actual five BSP stocks are chosen, based on dividend yield and stock price criteria. Today, let's take a closer look at our new BSP 30 stocks, comparing them with last year's BSP 30 and the Dow 30.

Before we get started, I'd like to thank the ever-alert Fools who pointed out an error in the new BSP list. It was pointed out that Nortel Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NT)") else Response.Write("(NYSE: NT)") end if %>, with its corporate headquarters in Ontario, is a Canadian company. Since the BSP 30, like the Dow 30, invests only in American companies, Nortel shouldn't be included on our list. In its place goes GTE Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GTE)") else Response.Write("(NYSE: GTE)") end if %>, another telecommunications leader. We've changed the LiveCalc stock list generator to reflect this and also changed the list in the archived copy of last week's column to avoid any (more) confusion.

The following table lists some basic stock characteristics for this year's BSP 30 stocks, comparing them to last year's list, and also to the current Dow 30 stocks. To minimize the effect of outliers in each group, all numbers listed are the median.

  Top    Market Cap    Dividend  Stock    P/E
Yielders  ($ Billion)  Yield(%)  Price   Ratio*
BSP 1999   $61         1.0%      $58.00   31
BSP 2000   $66         1.0%      $65.00   35
Dow 30     $80         1.5%      $60.00   25

* Price-to-earnings ratio

When we compare this year's BSP list to last year's, we find that the market cap has increased slightly, which isn't too surprising since the new BSP list chooses the highest capitalized stocks that are available. The 30 new BSP stocks have a slightly smaller market capitalization than the Dow 30 stocks, and the dividend yield of the group as a whole is still less than the Dow.

Despite the recent Dow changes, including the addition of Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> and Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>, the BSP 30 still contains more of the so-called "New Economy" companies than the Dow, which accounts for the lower dividend and the larger P/E. Such rapidly growing companies tend to pay lower dividends. They choose to invest excess cash in the growth of the company rather than distribute it to shareholders.

The lower median yield for the new BSP 30 stocks compared with the Dow 30 (1.0% vs. 1.5%) might be considered a disadvantage when we using strategies that choose high-yielding stocks. However, much (but not all) of the yield difference diminishes when we look at a subgroup of BSP or Dow stocks from which most of our purchases will be made -- that is, the highest-yielding stocks.

The table below shows the data for the 10 highest-yielding stocks in the BSP and in the Dow. In addition, I've created another group, the BSP/Dow 10, which represents the 10 highest-yielding stocks from the 60-company group created when the Dow and BSP are combined.

  Top     Market Cap   Dividend   Stock    P/E
Yielders  ($ Billion)  Yield(%)   Price   Ratio
BSP 10      $66         2.1%      $55.00   17          
Dow 10      $42         2.5%      $57.00   14
BSP/Dow 10  $50         3.0%      $55.00   14

When we select out the highest-yielding stocks from each of our groups, the relative difference in yields between the BSP and Dow stocks decreases. Interestingly, for these high-yielders, the size of the 10 BSP stocks is greater than that of the 10 Dow stocks. The explanation for this lies in the inverse relationship that exists between the Dow stocks' yield and market capitalization. Many of the Dow companies that are the highest yielders are also the smallest. Caterpillar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %>, Eastman Kodak <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %>, International Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %>, and J.P. Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> have market caps less than $25 billion, significantly lower than the $29 billion market cap of Kimberly-Clark <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMB)") else Response.Write("(NYSE: KMB)") end if %>, the smallest BSP 30 stock.

The BSP/Dow 10 group in the table represents an interesting set of stocks. The yield for this set of stocks is significantly higher than that of either group alone. Furthermore, the median size of these companies is higher than that of the top 10 high-yielding Dow stocks, potentially another advantage.

The current stocks and yields for such a BSP/Dow blend, based on the RP method for choosing the stocks (as of yesterday's close), are:

Ford <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %>                   4.5%
Caterpillar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %>          3.4%
Bank of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %>      3.7%
International Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %>   2.7%

Though not backtested, this group of blended BSP/Dow stocks offers intriguing possibilities for future research. With the concern about the lower yield for stocks in general, such a combination might offer the possibility for maximizing stock yield without sacrificing size.

The current BSP and Dow stocks can be found in our Foolish Calculator, which also contains a listing for the Dow/BSP blend stocks. Take it for a spin.

Beating the S&P year-to-date returns
(as of 03-28-00):

Bank One <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %>           +9.9%
PepsiCo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %>            -7.4%
Ford Motor Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %>      -15.6%
Bank of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %>    +7.7%
Fannie Mae <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNM)") else Response.Write("(NYSE: FNM)") end if %>         -5.3%
Beating the S&P                -2.1%
Standard & Poor's 500 Index     2.6%

Compound Annual Growth Rate from 1-2-87:
Beating the S&P               +23.9%
S&P 500                       +17.9%

$10,000 invested on 1-2-87 now equals:
Beating the S&P             $167,800
S&P 500                      $87,700