Week 353 - Dow Jones Companies in “The 2 and 8 Club”

Situation: “The 2 and 8 Club” is based on mathematics. Specifically, William Bernstein has shown that two factors largely determine your returns from buying a dividend-paying stock. Those are: 1) Dividend Yield; 2) Dividend Growth Rate (see The Four Pillars of Investing by William Bernstein (McGraw Hill, New York, 2002, ISBN 0-07-138529-0). Add those numbers together and you arrive at a working estimate of your long-term total return. Given that you can invest in the Dow Jones Industrial Average (DIA) or the S&P 500 Index (SPY) with negligible transaction costs and expect a 7%/yr long-term total return, you’d have to shoot for 9%/yr if you were to become a stock-picker. Why? Because you’ll do a lot of research and become a trader, which means you’ll have to pay transaction costs and capital gains taxes. Accordingly, we look for stocks that have an above-market dividend yield (i.e., more than ~2%/yr) and a 5-yr dividend growth rate greater than ~8%/yr, hence our designation as “The 2 and 8 Club.” 

Mission: “The 2 and 8 Club” has ~20 companies (see Week 348). Compare that to the 65-stock Dow Jones Composite Index selected by the Managing Editor of The Wall Street Journal. Apply our Standard Spreadsheet to companies that appear on both lists.

Execution: see Table showing metrics for all 9 such companies.

Administration: Our starting point is the US version of the FTSE High Dividend Yield Index, which is composed of the ~400 highest-yielding companies in the Russell 1000 Index. The Vanguard High Dividend Yield Fund ETF (VYM) clones that list and updates it monthly. After winnowing that list down to companies that have grown their dividend 8%/yr or faster, we eliminate any that do not have the 16 year trading record needed for quantitative analysis and S&P stock and bond ratings indicative of high quality (at least B+/M and BBB+, respectively). To further aid analysis, we only include companies that are on the latest annual Barron’s 500 List.

Bottom Line: Aside from NextEra Energy (NEE), these are risky stocks to own (see Column M in the Table). As a group, they’ll go up or down in price more than the market. Even if you own shares of all nine, you need to be watchful. You’ll need to learn how to spot trouble (or opportunity) well enough to sell (or buy) shares in a timely manner. But the rewards are substantial (see Columns C, F and K in the Table).

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

Full Disclosure: I dollar-average into MSFT, NEE, MMM, JPM and IBM, and also own shares of CSCO, BA and CAT.

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