- Dogs of the Dow investment strategy
In our discussion of the Dogs of the Dow strategy, we discussed that the goal is to buy either the top five or top ten highest yielding stocks of the Dow Jones Industrial Average. After holding these stocks for one year, you would then sell the stocks that are no longer among the top ten highest yielding stocks of the Dow and replace them with companies that are among the new high yielding stocks. The purpose of this exercise has multiple functions:
- By using Dow stocks, you're getting the highest quality and widely followed companies.
- The highest yielding stocks are generally considered to be at a lower relative price.
- Selling after one year helps to avoid short-term tax consequences.
- high yield implies low price, low price implies less downside risk with greater chance to compound income.
The current top 10 high yielding stocks are as follows:
- General Electric (GE) at 12.5%
- Pfizer (PFE) at 9.3%
- DuPont (DD) at 7.5%
- AT&T (T) at 6.3%
- Caterpillar (CAT) at 6.1%
- Verizon (VZ) at 6%
- Merck (MRK) at 5.7%
- American Express (AXP) at 5.6%
- Kraft Foods (KFT) at 5.3%
- Boeing (BA) at 4.7%
Let's see what the performance of these companies will be as time goes on. As was discussed before, taking the very highest yielding stock, GE, may have the most risk of eliminating their dividend, getting kicked off the index or even going out of business. Only time will tell.
- Cash in the Hand
So far we've been able to witness the gains and losses in Bank of America (BAC) week after week. Interestingly, in each discussion we've had I have encouraged that we either sell short after large gains in the stock price or go long (buy) BAC when the price has fallen by large amounts. The lesson that should be learned is that excessive moves up or down are never permanent. For this reason, if you happen to be on the right side of a trade then protect your profits. Otherwise you'll end up wishing you sold or bought the stock after the fact. Again, this is very important when you are trading. However, even as I have invested in companies that I thought I would hold for the long term performed better when I sold after a nice gain. As an investor I don't sell short.
- Companies thought to be around forever, won't be.
As we reviewed the companies that were among the top 10 highest yielding stocks we started to wonder why someone wouldn't by our nation's biggest, best, and most profitable companies. After all, they'll be around forever so what's the risk? As investors and employees, we should always take the perspective that no company is safe. Just look at what happen to Lehman, AIG (AIG), Fannie Mae (FNM), and Freddie Mac (FRE). Ask yourself this, two years ago would you have considered that Washington Mutual would no longer exist. This partially explains why investors need to take their profits and move on to the next best alternative.
- Setting up your own list of stocks on Yahoo!Finance
The question was asked, "How can a person keep track of all the companies that have reached a new 52-low?" My answer is that by setting up a Yahoo!Finance account, you can track almost any set of companies that interest you. While there are over 5000 traded stocks and mutual funds, I focus on those companies that have increased their dividend every year for at least 10 years in a row. This list of companies can be found online at the following link. The list contains about 300 companies and is built on the concept of quality first. Once a list of companies is set up, Yahoo!Finance let's me set up the type of information that I can have show up on the page. I always include the % change from 52-week low. This tells me which companies are closest to the most recent low. Any company at a new low is where my research begins.
IBM is doing what every investor should try to do and that is buy at the lowest possible price. IBM also knows that in August of 2000 JAVA was selling for $257 a share. Now, IBM can buy JAVA for less than $10 a share. But why JAVA and why now? JAVA has patents that are critical for the use of internet communications between many different operating systems. When I say operating systems don't forget that Windows, Mac OS and Linux aren't the only operating systems. New ones are being created everyday with the use of cell phones and portable gaming devices. All of these devices wouldn't work on the web if it wasn't for the java script language. I wouldn't buy JAVA in anticipation of this deal getting done. Instead, I would be interested in IBM once it becomes clear that they are going to purchase JAVA and IBM's price falls significantly.
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