The Average Joes Of The Dow
Summary We all know about the Dogs of the Dow. Last week I wrote about the Dow’s lowest-yielding stocks – the Gods of the Dow. The next step was to look at the middle-yielding stocks – the “Average Joes of the Dow.” See the results. In the past week I released an article, exclusively on SA, called ” The Gods of the Dow .” The main thrust of the article was to compare the performance of the 10 highest-yielding stocks of the Dow (the Dogs) against the 10 lowest-yielding stocks (what I called “the Gods”) over a decade. The Dogs won the contest by quite a margin. Here is a summary chart showing the performance of the investment strategies. The next logical step is to see how the middle 10 stocks of the Dow would perform. I call this cohort of stocks the “Average Joes of the Dow.” I am having a bit of fun running these tests, but I do believe these 3 groups – the Dogs, the Gods, and the Average Joes – act as rough proxies for value investment, growth investment and the middle ground in between. The Average Joes of the Dow Investment Strategy On December 31, buy the Dow’s 10 middle-yielding stocks. Hold these stocks for a year. Sell the 10 positions on December 31 the following year. Repeat the above process annually. Note: Stocks that are dropped from the Dow during the course of the year are still held until year-end — e.g., you would still hold AT&T through December 31, 2015, if you had purchased it December 31, 2014. Another note: The data for the test comes from the “Dogs of the Dow” website. I am not sure what would happen in the event or a merger or acquisition. A current example would be Pfizer: Allergan has proposed acquiring Pfizer in 2016. If you bought Pfizer on December 31, 2015, you would most likely sell the merged company or acquirer on December 31, 2016, but I am uncertain as to how such events were handled in this historic data set. The Dogs of the Dow Investment Strategy The same as above, but you buy the 10 highest-yielding stocks of the Dow year after year. The Questions What was the annual performance of each strategy on a total return basis? What was the overall performance of each strategy over a 10 year period? Some Sample Data The Dogs of the Dow on December 31, 2014 were: (NYSE: T ) AT&T 33.59 5.48% (NYSE: VZ ) Verizon 46.78 4.70% (NYSE: CVX ) Chevron 112.18 3.82% (NYSE: MCD ) McDonald’s 93.7 3.63% (NYSE: PFE ) Pfizer 31.15 3.60% (NYSE: GE ) General Electric 25.27 3.48% (NYSE: MRK ) Merck 56.79 3.17% (NYSE: CAT ) Caterpillar 91.53 3.06% (NYSE: XOM ) ExxonMobil 92.45 2.99% (NYSE: KO ) Coca-Cola 42.22 2.89% The Average Joes of the Dow on 31 December 2014 were: PG Procter & Gamble 91.09 2.82% IBM International Business Machines 160.44 2.74% CSCO Cisco Systems 27.82 2.73% JNJ Johnson & Johnson 104.57 2.68% MSFT Microsoft 46.45 2.67% JPM JPMorgan Chase 62.58 2.56% DD DuPont 73.94 2.54% INTC Intel 36.29 2.48% BA Boeing 129.98 2.25% WMT Wal-Mart 85.88 2.24% The Results The total returns each year of the Joes vs. the Dogs is shown in the chart below: 2005 2006 2007 2008 2009 Joes 7.65% 18% 16.60% -24.81% 26.65% Dogs -3.46% 25.80% 2.10% -36.56% 17.19% 2010 2011 2012 2013 2014 Joes 16.40% 9.25% 13.19% 33.77% 11.63% Dogs 21.43% 16.85% 8.95% 28.54% 6.45% Here’s a year-by-year comparison of the Joes Vs the Dogs in an easier-to-read graphic. The true outperformance is best explained by considering how well a $10k investment in each strategy on December 31, 2004, would have fared, as shown below: Over the 10-year period, the Joes strongly outperformed the Dogs. The Dogs strategy would have nearly double your money in 10 years, turning $10,000 into $19,320 — not bad. But the Joes strategy would have performed much better, turning $10,000 into $30,320! Conclusion First of all, I want to qualify the above analysis with the observation that it is only based on 10 years of data. As such, the Joes may have had a few exceptionally good years at the start of the decade which then exaggerates out-performance in the later years of the decade. Indeed looking at the Joes cohort from 31 December 2014, one would be concerned by some of the picks: P&G has lost 14% TR YTD IBM has lost 11% TR YTD Wal-Mart has lost 28% TR YTD But despite the above, the Average Joes has only lost 3% YTD on a total return basis. The Joes has included some good performers: MSFT has gained 20% TR YTD Boeing has gained 15.5% TR YTD JPMorgan Chase has gained 10% TR YTD The Dogs have had a better 2015 so far, with just a 1% loss. I have to say it is quite comforting to know that with such big individual losers in the Joes, that the overall loss is not too bad. I know in my own portfolio that I have had big losers this year, and it is quite easy to dwell on those underperformers. When I look at my total performance, it’s actually okay — it’s breaking even — and I need to focus on the big picture.