The Dow High Yield Investing Approach

The essence of this program is to buy the ten highest yielding stocks of
the Dow 30 stocks.  A variation is to buy the five lowest priced of the 10
highest yielding Dow 30 stocks.

The thirty year results of this program have been extraordinary. With a
better than fifteen percent annual rate of return, on paper the monies
invested before taxes would have grown more than 64 times. In a paper trial
for period December 31, 1959 to December 31, 1991 a one hundred thousand
dollar investment would have grown to $10,576,519 before any taxes.

Why does the Dow High Yield (DHY) technique work?
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ

It is based on the fact that the Dow 30 stocks have an incredibly stable
dividend payout history, i.e., they rarely cut their dividends during
periods of poor earnings. Because large institutions tend to buy and sell
stocks on earnings and earnings expectations, a Dow 30 stock with poor
earnings will see its price drop as institutions sell it. Its yield will
rise because the dividend is maintained.  The high yielders are bought when
institutions have sold the stock and driven down its price. This is the a
great contrarian approach to investing - buy when the institutions hate the
stock and sell when they love it.   When the stock price begins to rise
there is often an added bonus as improved earnings lead to a dividend
increase.  Mutual funds can't use the technique because they are required
to be more diversified than the DHY permits.   Periodically,  a high
yielding stock DOES have its dividend cut. The most recent example is IBM.
A simple way of avoiding this problem is to determine how many times the
dividend is covered by cash flow. In the case of IBM, its cash flow was not
covering its dividend and had not been doing so for 2 years.  With no
improvement in cash flow, a dividend cut was inevitable.  It is even
possible to estimate what the new dividend might be by examining cash flow.

How does the DHY technique work?
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ

At any month end (the returns over the past 25 years confirm that there is
no one month that is any better than another),  go through the stock quote
pages of your newspaper writing down the closing price and the yield.  If
the paper does not list the yield, write down the dividend and calculate
the yield by dividing the dividend by the price.  Make sure that the
dividend is the annual payout and does not include any special payouts.
Rank the 30 stocks in descending order based on yield.  Select either the
10-stock portfolio or the 5-stock portfolio, call your discount broker, and
buy equal dollar amounts of each stock.

One year later repeat the exercise and rebalance the portfolio.  Some
stocks will be sold;  some will be kept;  some will be kept and added to.


Many questions have arisen since I first started this program:

1.  What happens if the dividend is cut?

    Continue holding the security for one year after purchase. Since 1960
    there have been twelve dividend cuts, GM three times, and yet, in many
    cases the stock price has gone up after the dividend cut.

2.  What happens if the stock is taken off the Dow Jones Industrials?

    Continue holding the stock for one year after purchase.Most recently
    USX, Primeamerica, and Navistar were dropped from the Dow in May, 1991.
    Only USX had been in top ten yielders recently. As of April 1991, the
    price of the old USX is up, as are the prices of Primeamerica and
    Navistar. In the past when Chrysler and Johns Manvill were take off the
    prices were higher a year later. In both cases the dividend had been
    eliminated.

3.  What happens if the stock is split or has an asset spinoff?

    Keep all of the post split shares or spinoff shares until it is time to
    rebalance the portfolio.

4.  What about cash dividends?

    Invest them in money market fund.

5.  I do not have much money to start, and therefore can not buy round lots?

    Do not worry.  Buy whole shares.  The odd lot differential is not a
    major hurdle and will not radically affect the long term results.  It
    is possible to use the DHY with as little as $5,000.

6.  Where can I learn more about the DHY technique?

    Beating the Dow.  A High-Return, Low-Risk Method for Investing in the
    Dow Jones Industrial Stocks with as Little as $5,000.  Michael
    O'Higgins with John Downes.  HarperCollins, 1991.  ISBN 0-06-016479-4

    The Dividend Investor.  A Safe Sure Way to Beat the Market.  Harvey C.
    Knowles III & Damon H. Petty.  Probus Publishing Company, Chicago,
    1992. ISBN 1-55738-243-3