We continue to work on a series of selections of the Dow Jones Industrial Average. The Dow is made up of only 30 stocks which make up more than a quarter of the U.S. stock market. Given that we are in troubled times and the large companies are going to be the ones that will best weather out the storms, we are looking for and grading filters that help us to come up with stock selection ideas.
John Maxfield of the Motley Fool has done some interesting research where he selected and ranked what are arguably the Dow's 10 best dividend-paying stocks.
1. Rank by screening for the Dow's 10 best-yielding stocks:
|AT&T (NYSE: T)||5.89%|
|Verizon Communications (NYSE: VZ)||5.37%|
|Merck (NYSE: MRK)||4.64%|
|Pfizer (NYSE: PFE)||4.23%|
|DuPont (NYSE: DD)||3.66%|
|General Electric (NYSE: GE)||3.63%|
|Intel (Nasdaq: INTC)||3.57%|
|Johnson & Johnson (NYSE: JNJ)||3.54%|
|Kraft Foods (NYSE: KFT)||3.28%|
Source: Yahoo! Finance (as of Oct. 17, 2011).
2. Ranked and scored according to sustainability, predictability, and general quality:
- Sustainability -- dividend's size relative to free cash flow per share.
- Predictability -- when the company started paying a dividend.
- Quality -- leverage the Fool's CAPS scores
3. Add up and rank the scores:
FCF Payout Ratio (Points)
Year Started Paying Dividends (Points)
Caps Rating (Points)
|General Electric||26% (10)||1899 (9)||4 (8)||27|
|Pfizer||28% (8)||1939 (6)||4 (8)||22|
|Johnson & Johnson||48% (5)||1944 (5)||5 (10)||20|
|DuPont||59% (3)||1904 (8)||4 (8)||19|
|Merck||52% (4)||1935 (7)||4 (8)||19|
|Travelers||27% (9)||1990 (3)||3 (6)||18|
|AT&T||70% (2)||1881 (10)||3 (6)||18|
|Verizon Communications||47% (6)||1984 (4)||4 (8)||18|
|Intel||43% (7)||1992 (2)||4 (8)||17|
|Kraft Foods||131% (1)||2001 (1)||4 (8)||10|
There are three benefits to using this filter
- Using Dow stocks, we know that these are all large organizations
- Dividends are an important component and often reflect well run companies
- We want to be aware of companies using dividends as a means of attracting investors but where performance might be weak
Hopefully this filter will enable us to sort out which look like a good investment.
We will compare this with out reference dividend bearing ETF portfolio.
|Asset||Fund in this portfolio|
|REAL ESTATE||ICF (iShares Cohen & Steers Realty Majors)|
|FIXED INCOME||TIP (iShares Barclays TIPS Bond)|
|Emerging Market||VWO (Vanguard Emerging Markets Stock ETF)|
|US EQUITY||DVY (iShares Dow Jones Select Dividend Index)|
|US EQUITY||VIG (Vanguard Dividend Appreciation ETF)|
|INTERNATIONAL EQUITY||IDV (iShares Dow Jones Intl Select Div Idx)|
|High Yield Bond||HYG (iShares iBoxx $ High Yield Corporate Bd)|
|INTERNATIONAL BONDS||EMB (iShares JPMorgan USD Emerg Markets Bond)|
- Dow Jones Dividend Leaders -- Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)
|Portfolio/Fund Name||1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Tactical Asset Allocation Moderate||3%||20%||10%||79%||8%||60%|
|Retirement Income ETFs Strategic Asset Allocation Moderate||-1%||-5%||15%||81%||2%||7%|
|Dow Jones Dividend Leaders||6%||35%||15%||71%||2%||3%|
As I review the table, I think that this is a very interesting set of returns. Bear in mind that with our simulations, we reinvest the dividends (we are working on splitting out the dividends separately) so some of the additional returns will be dividends that can be taken for income. I think that this is a very interesting approach that is worth consideration.
As I compare this selection with the buy and hold approach for the dividend ETF portfolio, I think that there is some real merit here. This is a simple-to-administer approach and could be the basis of a core portfolio for those who are looking for stability and income. In the next article, we will dig into the rankings to see if we can improve the returns a little.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.