The Dow 10 Strategy: Dead or Alive?

|
Includes: C, CVX, DD, GM, INTC, JNJ, JPM, MCD, MDLZ, MO, MRK, PFE, T, VZ
by: Insider Monkey

The Dow10 strategy calls for investing in 10 of the highest dividend yielding stocks in the DJIA. At the end of the year, the portfolio is reconstructed to include prior years' dividend champions. In his book Stocks for the Long Run, Professor Jeremy Siegel mentions the DOW10 strategy as one of the most successful investment strategies. We back tested this strategy using the last decade’s data. The champions of dividends include DuPont (NYSE:DD) (10 years) and JP Morgan Chase (NYSE:JPM) (9 years), followed by AT&T (NYSE:T), General Motors (NYSE:GM), Altria (NYSE:MO) (8 years). Here are our results:

The table below shows the dividend yields and capital appreciation for the Dow10 stocks.

Year

Dividend Yield

Capital Appreciation

Net Return

2001

3,45%

-7,8%

-4,35%

2002

4,09%

-12,2%

-8,11%

2003

3,35%

23,6%

26,95%

2004

3,87%

0,5%

4,37%

2005

4,77%

-8,9%

-4,13%

2006

3,59%

24,8%

28,39%

2007

4,19%

-1,4%

2,79%

2008

4,98%

-41,6%

-36,62%

2009

3,25%

12,9%

16,15%

2010

3,87%

15,5%

19,37%

Click to enlarge

Over the same period, the returns from the DJIA are as follows:

Year

Dividend Yield

Capital Appreciation

Net Return

2001

1,95%

-7,1%

-5,15%

2002

2,47%

-16,8%

-14,33%

2003

2,12%

25,3%

27,42%

2004

2,3%

3,1%

5,42%

2005

2,67%

-0,6%

2,07%

2006

2,34%

16,3%

18,64%

2007

2,6%

6,4%

9%

2008

3,81%

-33,8%

-29,99%

2009

2,55%

18,8%

21,35%

2010

2,57%

11%

13,57%

Click to enlarge

The following graph illustrates the value of $100 invested in Dow10 stocks.


Ignoring the transaction costs, the DJIA portfolio reached $140 whereas Dow10 portfolio became only $130 by the end of 2010. Dow 10 strategy was doing fine until the financial crisis hit. Two of the biggest losers in DJIA were also part of the Dow10 portfolio: Citigroup (NYSE:C) lost 77% and General Motors (GM) was off 87% in 2008. If we take transaction costs into account, the Dow10 returns would be slightly smaller. After tax, returns of the Dow10 strategy are also worse than the returns of a portfolio that passively invests in Dow 10 stocks. Jeremy Siegel might be right in that the Dow stocks with the highest dividends had higher returns in the past, but that wasn’t the case during the past decade. If you agree with Jeremy Siegel, here are the 10 members of the DJIA with the highest dividend yields in 2010:

2010 Yield

YTD Return

P/E Ratio

1 - AT&T (T)

5.7%

-4.01%

8.79

2 - Verizon (NYSE:VZ)

5.3%

1.79%

40.45

3 - Merck (NYSE:MRK)

4.2%

-8.32%

120

4 - Pfizer (NYSE:PFE)

4.1%

8.68%

18.58

5 - Kraft Foods (KFT)

3.7%

-1.27%

19.57

6 - Johnson & Johnson (NYSE:JNJ)

3.4%

-1.49%

12.52

7 - EI DuPont de Nemours (DD)

3.3%

8.92%

16.47

8 - Chevron (NYSE:CVX)

3.1%

5.97%

10.20

9 - Intel (NASDAQ:INTC)

3.0%

3.66%

10.64

10 - McDonald’s (NYSE:MCD)

2.9%

-1.3%

16.53

DJIA Average

2.72%

5.60%

13.5

Click to enlarge

Some of these stocks are also favored by hedge funds. David Einhorn has a large position in Pfizer and Bill Ackman likes Kraft a lot.

Disclosure: I am long T, C.