FOOLISH FOUR PORTFOLIO

Foolish Four Portfolio
The Dow Bulks Up
A Beating the S&P Perspective

By Ethan Haskel (TMF Cormend)

BALTIMORE, MD (Nov. 3, 1999) -- There's certainly been a lot of brouhaha brewing about the recent changes made in the composition of our beloved 30 Dow stocks. We here at Foolish Four Central have been furiously working overtime trying to put these changes in perspective. Sleepless, fretful nights give way to daytime obsessions in which "SBC Communications" keeps playing over and over and over in our minds. SBC, SBC, SBC....

Actually, not.

But we have been thinking about these changes kind of a lot.

In case you missed it, Dow Jones & Co. replaced four of the stocks in the Dow 30, saying good-bye to Depression-era stalwarts Chevron (NYSE: CHV), Goodyear Tire (NYSE: GT), Sears (NYSE: S), and Union Carbide (NYSE: UK). The substitutes include Home Depot (NYSE: HD), Intel (Nasdaq: INTC), Microsoft (Nasdaq: MSFT), and SBC Communications (NYSE: SBC).

It's as if our dowdy Dow was given a jolt of anabolic steroids. Pee Wee Herman walks into the phone booth, and out comes Arnold Schwarzenegger.

What are the long-term implications as the Dow gradually replaces old-economy, industrial companies with those promising the potential for higher growth?

Certainly one effect we've noticed is that the four Dow newcomers don't have anywhere near the dividend yield as that of our old friends. As of Monday, the average yield for the newbies is a measly 0.55% versus 2.62% for our golden oldies. The average yield for both the Dow as a whole and our 10 highest-yielding Dow stocks dropped by about 0.3%.

Does this change represent the death knell for the Foolish Four? Should we all jump ship, sell our Sears, Goodyear, or JP Morgan (NYSE: JPM) and place buy orders for Rule Breaker stocks EBay (Nasdaq: EBAY) or Starbucks (Nasdaq: SBUX)?

To help answer this question, let's list a few stocks, along with their current dividend yields (as of Monday). What do these stocks have in common?

Motorola (NYSE: MOT)               0.47%
Monsanto (NYSE: MTC)               0.32% 
Time Warner (NYSE: TWX)            0.26%
Gap, The (NYSE: GPS)               0.25%
Home Depot (NYSE: HD)              0.21%
American Int'l Group (NYSE: AIG)   0.20%
Texas Instruments (NYSE: TXN)      0.20%
Intel (Nasdaq: INTC)               0.16%
Tyco International (NYSE: TYC)     0.14%
Lucent Technologies (NYSE: LU)     0.12%
Waste Management (NYSE: WMI)       0.11%
The astute among us have noticed that these stocks actually have two common characteristics. The most obvious similarity is that all these stocks pay relatively low dividends. These muscle-bound Schwarzeneggers seem downright Pee Wee when it comes to distributing their extra cash to stockholders.

Perhaps less apparent is that all these stocks belong to the current Beating the S&P stocks, from which our higher-yielding BSP stocks are chosen. (For a full list of the BSP 30 stocks, click here).

The BSP 30 stocks, year in and year out, have had a significant number of low-yielding stocks, just like those above. In fact, many of these stocks have been perennial members of our BSP club. American International Group was a charter member since the first year backtesting data became available, in 1987. Waste Management joined a year later.

Here are some more numbers:
             Average Annual Return
           since 1987     since 1994
BSP          25.0%          33.1%
S&P 500      17.4%          22.2%

I submit BSP as "Exhibit A" for the defense that a slightly lower-yielding group of 30 Dow stocks can continue to outpace the markets going forward. For every high-tech, high-flying Lucent, we still have a Schlumberger (NYSE: SLB), which entered the portfolio when oil prices were depressed. This oil service giant's stock is ahead 30% this year. Or a Ford (NYSE: F), up 70% last year. Or a Kellogg (NYSE: K), gaining 54% the year before.

As long as we find market-leading companies and invest in them when they're temporarily depressed -- as indicated by their high yield relative to other market-leading companies -- we should do just fine. There, that should put our Foolish minds to rest.

Hmmm....

SBC, SBC, SBC, SBC....
Beating the S&P year-to-date returns (as of 11-02-99):

Schlumberger (NYSE: SLB)      +30.3%
Kimberly-Clark (NYSE: KMB)    +15.4%
Campbell Soup (NYSE: CPB)     -15.5%
Ford Motor Co.  (NYSE: F)      -4.1%
Bank of America  (NYSE: BAC)   +9.1%
Beating the S&P                +7.0%
Standard & Poor's 500 Index    +9.6%

Compound Annual Growth Rate from 1-2-87: Beating the S&P +25.0% S&P 500 +17.4%
$10,000 invested on 1-2-87 now equals: Beating the S&P $175,600 S&P 500 $78,000

Today's Stock Lists | 1999 Dow Returns

Read More Foolish Four Reports


Top Dow Stocks
( RP Order )

11/3/99

1. Philip Morris
   (NYSE:MO)
2. * General Motors
   (NYSE:GM)
3. * Caterpillar
   (NYSE:CAT)
4. * Eastman Kodak
   (NYSE:EK)
5. * DuPont
   (NYSE:DD)
6. Exxon
   (NYSE:XON)
7. AT&T
   (NYSE:T)
8. JP Morgan
   (NYSE:JPM)
9. SBC Communications
   (NYSE:SBC)
10. International Paper
   (NYSE:IP)

NOTE: Today's Foolish Four stock selections are marked with an asterisk.

Foolish Four Portfolio

11/3/99 Closing Numbers
Ticker Company Dly Pr Chg Price
CATCATERPILLAR INC9/16$56.63
IPINTL PAPER1/4$53.38
JPMMORGAN (JP)-2 13/16$129.13
MMMMINNESOTA MIN'G/MFG-3/8$94.50

  Day Week Month Year
To Date
Since
12/24/98
Annualized
Foolish Four -.22% .48% .48% 26.57% 28.45% 33.68%
S&P 500(DA) .53% -.59% -.59% 10.80% 10.87% 12.71%
NASDAQ 1.57% 2.09% 2.09% 38.12% 39.40% 46.99%
DJIA (DA) .26% -1.13% -1.13% 16.94% 17.11% 20.10%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
12/24/9824CAT43.083$56.6331.43%
12/24/9814MMM73.571$94.5028.45%
12/24/9822IP43.551$53.3822.56%
12/24/989JPM105.514$129.1322.38%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
12/24/9824CAT$1,034.00$1,359.00$325.00
12/24/9814MMM$1,030.00$1,323.00$293.00
12/24/9822IP$958.12$1,174.25$216.13
12/24/989JPM$949.63$1,162.13$212.50
  Cash: $119.51  
  Total: $5,137.89  

Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.
• DJIA (DA) = dividend adjusted. Dividends have been added to the total return of the DJIA.

Note
The Foolish Four Portfolio was launched on December 24, 1998, with $4,000. Additional cash is never added, all transactions are discussed and explained publicly before being made, and returns are compared daily to the S&P 500 and the Dow. (Dividends are included in the yearly, historic and annualized returns.) Stocks are chosen once per year using a formula based on dividend yield and price. See The Foolish Four Explained for details.