One Expert’s Way to Beat the Dow

One Expert’s Way to Beat the Dow

The strategy outperforms the market almost every year

There may be no sure-fire way to beat the market, but there is a strategy that comes convincingly close, author with Michael B. O’Higgins of Beating the Dow (Harper Perennial, 1992), suggests this system. At the beginning of the year, buy the 10 stocks out of the 30 Dow Jones industrials with the highest yields, often an indication that they’ve been labeled losers. (Calculate the yield by dividing the annual dividend by the stock price). Hold the stocks for one year and then repeat the process.

Sounds simple, but over the past 20 years, the strategy would have netted a handsome average annual 19 percent return, including dividends, compared to 14.3 percent for the Dow 30-stock average. The strategy has outperformed the Dow Jones Industrials for 17 of the past 22 years.

Downes suggests you budget at least $1,000 for each stock. By buying the individual stocks on your own, you can save the $450 or so it would cost to set up a $10,000 portfolio with a discount broker. Adjusting stock picks at the end of the year usually is not costly because typically more than half the stocks will remain on the list from year to year.

A Jamaican Beach. Photo by Elena

You also can buy the bargain 10 through unit trusts, which are sold through brokers such as Merrill Lynch, Smith Barney, Prudential Securities, and so on. The units are called the Select 10 portfolio and typically come with a 1 percent initial sales charge and 1.75 percent annual fee. The minimum purchase: $1,000 ($250 for individual retirement accounts). The trusts are liquidated each year, so to avoid capital gains taxes, you may want to hold on to them in an IRA.

A final tip: Investing in the cheapest five stocks of the ten highest yielders give you an extra kicker. Why? Because lower-priced stocks tend to move in greater percentage increments than higher-priced stocks and get better returns – even in grit-your-teeth years like 1994.