Situation: There have been 30 companies in the $7 Trillion “Dow” index since it was expanded from 20 companies on October 1, 1928. Since then 31 changes have been made. On average, a company is swapped out every 3 years. Turnover decisions are made by a committee directed by the Managing Editor of The Wall Street Journal. Dollar value is determined at the end of each trading day by adding the closing price/share for all 30 companies, and correcting that amount with a divisor that changes each time a company is removed & replaced. State Street Global Advisors (SPDR) markets an Exchange-Traded Fund (ETF) for the Dow under the ticker DIA. To get “a feel for the market” before buying or selling a stock, investors around the world look to the Dow. They’re aided in that decision by Dow Theory, which uses movement of the Dow Jones Transportation Average to “confirm” movement in the Dow. If both march together to higher highs and higher lows, the primary trend in the market is said to be up if trading volumes are large. If the reverse is true, then the primary trend is said to down.
Mission: Use our Standard Spreadsheet to analyze all 30 companies in the Dow.
Execution: see Table.
Administration: Many investors use a tried-and-true “system” called Dogs of the Dow (see Week 305), which calls for buying equal dollar-value amounts of stock in each of the 10 highest-yielding companies in the Dow on the first trading day of January and selling those on the last trading day of December. The idea is to have better total returns on your investment over a market cycle than you would from simply investing in DIA. The system works most years and over the long term. Why? Because a high dividend yield a) moderates any price decreases during Bear Markets and b) is such a large contributor to total returns.
Bottom Line: As a stock-picker, you need to keep up-to-date on Dow Theory and also know which high-yielding Dow stocks are among the 10 Dogs of the Dow. Dow Theory tells us that the stock market switched from being in a primary uptrend to being in a primary downtrend on December 20, 2018. The Dogs of the Dow for 2019 are the same as last year (see bold numbers in Column G of the Table), except that General Electric (GE) has been removed from the Dow and replaced by Walgreens Boots Alliance (WBA), which doesn’t have a high enough dividend yield to be considered a Dog. Instead, General Electric’s place has been taken by JP Morgan Chase (JPM).
When picking stocks from the Dow Jones Industrial Average, be aware that the historically low interest rates we’ve seen over the past decade have led to excessive corporate borrowing. You’ll want to pay close attention to Columns N-S in the Table, where different consequences of corporate debt are addressed. Companies with items that are highlighted in red carry a greater risk of loss in the upcoming credit crunch than has been recognized in the price of their shares.
Risk Rating: 5 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into NKE, MSFT, JPM, KO, INTC, JNJ and PG, and also own shares of MCD, TRV, CSCO, MMM, IBM, CAT, XOM and WMT.
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