by Garry Barker
Discipline is one of the first rules in successful investing, particularly with stocks. Emotions often can get the better of investors, causing them to react too quickly, only to regret their actions later. Two time-tested investment strategies, based on stocks in the Dow Jones Industrial Average (DJIA),* have shown that discipline can pay off over time. The strategies are often known as top-ten and low-five.
The top-ten approach
Top-ten investors buy the ten-highest yielding stocks in the djia and hold them for 12 months. After 12 months, investors sell any stocks that are no longer among the top ten and buy any that are new to the list.
The low-five strategy
Investors employing the low-five strategy purchase the five lowest- priced of the ten highest-yielding djia stocks. They hold the stocks for 12 months, after which time they readjust their portfolios so that they continue to own the five lowest-priced of the ten highest- yielding djia stocks.
Reasons behind the strategies
There are four primary reasons why investors have used the top-ten and low-five disciplines:
1. The stocks are blue chip names. The 30 companies in the djia are generally considered to be large and financially sound. Thus, they are viewed as relatively conservative.
2. The stocks are out of favor. When you buy the highest-yielding stocks, you are in effect purchasing issues that are out of favor. The high yield usually means the share prices are depressed.
3. The yields tend to support the stock prices in down markets. Stocks that offer moderate dividend yields tend to perform better during weak markets than stocks that do not offer a dividend.
4. Historical performance has been impressive. Both strategies have proven to be effective over time, according to "Beating the Dow," a monthly newsletter edited by John Downes (and a book of the same name by Michael O'Higgins with John Downes). From January 1973 through December 1994, a portfolio containing the top ten DJIA stocks would have posted average annual compound growth of 17.1% per year.** A low- five DJIA stock portfolio would have posted a 20.6% growth rate.** The DJIA rose 10.9% over the same time period. These returns assume reinvestment of dividends each 12 months, exclude brokerage commission costs, and assume the investment was made on the first trading day of the year. However, O'Higgins writes, "It doesn't matter what 12-month period is used as long as it is used consistently over time."
Information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed a solicitation on dean witter's part with respect to the purchase or sale of securities or commodities.
* Dow Jones Industrial Average (DJIA) is the property of Dow Jones & Company, Inc., which is unaffiliated with and has not participated in any way in the creation of the top-ten or low-five strategies or the selection of stocks therein.
** Past performance does not guarantee future results. While the top- ten and low-five strategies outperformed the DJIA is some years, they underperformed the DJIA in other years.