Week 348 - Capitalization-weighted Index of “The 2 and 8 Club”

Situation: Whatever your stock-picking method, you need to decide how to manage large vs. small company stocks. If most of your stocks are issued by S&P 500 companies, your benchmark is the S&P 500 Index. It’s the greyhound you’re trying to catch. You won’t be able to keep up unless you invest more in mega-cap stocks than in the remaining companies of the S&P 500 Index. (I’ll bet you wish you’d owned Boeing stock going into 2017.)

Our stock-picking method is to invest in mega-caps, specifically the S&P 100 Index companies that represent 63% of the market capitalization of the S&P 500. Membership in that Index requires their stocks to have active “exchange-listed options” on the CBOE (Chicago Board Options Exchange). That’s important because a strong market in Put and Call Options means that there will be accurate and prompt price discovery, which is the best way to protect investors from a sudden collapse in price. 

Mission: Use our Standard Spreadsheet to list the 22 S&P 100 companies that are in “The 2 and 8 Club” (see Week 327). 

Execution: see Table listing those 22 stocks by market capitalization.

Administration: We confine our attention to S&P 100 companies among the ~400 companies in the Russell 1000 Index that pay a stable above-market dividend, one that is usually above 2%/yr. The Vanguard High Dividend Yield ETF (VYM) is a capitalization-weighted Index of those 400 companies, and is updated monthly. We reject companies that have not grown their dividend ~8%/yr (or faster) over the most recent 5-Yr period. 

There are currently 22 members of “The 2 and 8 Club”. All 22 companies have BBB+ or better S&P Bond Ratings, and B+/M or better S&P Stock Ratings. Additionally, all 22 have at least the 16-yr trading record that is required for quantitative analysis by the BMW Method, which is based on stock prices that are updated every Sunday. 

Bottom Line: These 22 stocks collectively have greater volatility (see Column M in the Table) but higher long-term total returns (see Column C in the Table), than the S&P 500 Index (see the ETF SPY at Line 32 in the Table). Only 7 of the 22 have less price volatility than the S&P 500 Index (see Column M): KO, PEP, IBM, MO, UPS, NEE, TGT. If you’re not a gambler, stick to investing in those and the benchmark ETFs (SPY and VYM).

Risk Rating: 6 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10). 

Full Disclosure: I dollar-cost average into MSFT, JPM, KO and NEE, and also own shares of PFE, CSCO, PEP, IBM, MMM, MO, AMGN, TXN, CAT and TGT.

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