Coffee Sipping Big Board Stocks

[timhyma]

Found this article for July 2001- two companies no longer exists. Two have performed extremely well

Dow dividend Strategy

Tired of baby-sitting your portfolio? Here is a strategy from Motley Fool that lets you take a break. All you have to do is look at the Dow Jones Industrial Average (DJIA). The Dow is an index that compromises 30 public companies, each having over $7 billion in sales over the last year. The way to calculate these giants is to look at their market capitalization. This will tell you the total dollar value (Market cap is # of shares of stock times stock price). Based on the hugeness of these giants, many investors look to them for long term growth.

Now why follow this strategy? Look at the companies- Think any of them will go away in the next 10 years. Not likely. Another reason- Investors who try to manage too much research typically runs unprofitable or under-performing portfolios. The greatest mistake most investors make is trying to follow too many stocks. With this strategy you are working with a small ample of potential investments. Lastly, the DOW has met market performance growth for 60 years, according to analysis of historical performance.

Now, how does the Motley Fool suggest looking at these 30 stocks? They call it the foolish 4 approach. First principle is the dividend payment. This is a tool used by corporations to compensate shareholders by paying out earning directly to them. This moderates growth expectations. Now, all of this leads to the dividend yield. This is a calculation that measures payback per share based on stock price. Lets look at Kodak. Notice the dividend is $1.76 with a yield of 3.79%.
http://finance.yahoo.com/q?s=ek&d=c

What we are looking for is the highest yields in the DOW. We have to sort these out and pick the 10 highest yielding stocks. Make a chart with yield, dividend, and price.
Lets go here and start sorting: http://finance.yahoo.com/q?s=@^dji

We get the following:
Symbol yield dividend price
MO 4.44 2.12 47.80
EK 3.79 1.76 46.38
GM 3.09 2.00 64.72
JPM 2.98 1.36 45.65
DD 2.97 1.40 47.20
IP 2.76 1.00 36.18
CAT 2.69 1.40 51.99
SBC 2.52 1.02 40.62
PG 2.17 1.40 64.60
HON 2.15 0.75 35.10

In a book by Michael Higgins, Beating the Dow, he narrows this down to 5 stocks. He believes in taking advantage of volatility of lower priced issues. So we take this list and pick the 5 lowest priced issued. Here is what we have:
Symbol yield dividend price
HON 2.15 0.75 35.10
IP 2.76 1.00 36.18
SBC 2.52 1.02 40.62
JPM 2.98 1.36 45.65
EK 3.79 1.76 46.38

The Motley fool took this approach one step further. They did some analysts on this on noticed that the lowest price issue performed the worst of the top ten yielding stocks. If you follow the history, the lowest priced stock is often that of a company in real trouble, thus a suffering stock price. So- we throw out the lowest price stock. Motley fool also noticed that the second lowest price stock performs the best. So their formula is 2-2-3-4-5. How does this work? You invest equal amounts (20%) into each number. Lets use $10,000 as our investment. You end up buying 110 shares of IP, 50 shares of SBC, 44 shares of JPM, 43 shares of EK. Total outlay before commissions is $10,013.74.

Why does this Work? The institutional investors have a short-term mentality. They are constantly realigning there portfolios to show winning stocks (some call this window dressing). Therefore when daily, weekly, monthly and quarterly reports come out, they scramble to the stock of the day, dropping what may be termed “dog stocks” because that stock is not being talked about. Secondly, Retirees typically invest in strong returns with little volatility. They are looking to generate steady streams of capital. So, they are not running to the next CSCO or MFST. Recognizing the need, financial planners and brokers put them in stocks that provide dividends substantial enough to support their customer’s basic living expenses. So the stability in the Dow continues. One last reason is this approach overlooks brand name weakness. When the news media attacks a company, investors overreact.

I’ve been running a mock portfolio since MLK (Jan) day. Currently, using this strategy has yielded 15.5%. No baby-sitting on this account. Now what is recommended is to review this account yearly. Run the selection again and make the adjustments.
The advantages are, lowering commission costs (only trading a max of 8 times per year), No stress watching the market (this is a proven strategy), more free time for family and hobbies.
Some disadvantages may be, Missing out on the real winning market. Only 8 trades per year, and only doing it once a year = boring. Now if you want to know how the Motley Fool selects bigger winners, I suggest picking up a book called “ The Motley Fool Investment Guide” by David and Tom Gardner. Good pointers in there, and if you follow some of their tactics for investing- The price of the book is well worth the “investment”.