Stocks & Strategy I

Priorities & Profits

A few month ago, a client of mine from Austria asked me to support him in the process of recruiting an employee for his office in Romania.

The open position included regular office duties with a changing workload, sometimes low, but just the next day could bring a ton of work, I was told. And the candidate should be fluent at english.

Selection based on the submitted CV was a bit tricky, since romanian job seekers are very, very creative, when it comes to their CV. I had to look for something else to choose the right person.

Based on the requested abilities for the job, I composed a questionnaire in english for the invited candidates. They had to answer 10 questions within 20 minutes in separate rooms.

Questions 1 to 3 were quite easy, quick to answer and should give confidence. Piece de resistance was number 4. This question was not to answer fully in time. Number 5 to 10 on the back-page were then much easier again.

The idea was to find out, if a candidate would quickly decide to leave number 4 out, instead answer 5 to 10 and come up with 9 correct answers in time, or if the applicant would stick at 4 till time is over and deliver only 3 correct and 1 half-correct answer.

The client engaged someone who set the priorities right – and the selected lady is doing a good job, I was told last time I spoke with my client.

The right priorities can not only get you a job, it’s also a tool to make profits in financial markets. The big difference here: You don’t have to do as much as you can in an certain amount of time – setting the right priorities in financial markets means: Do less, but do it right.

If you follow the stock market you get a endless stream of distracting and ‘breaking’ financial news from TV or internet that might lead you to give daily orders via your online broker. But just because you can trade easy from your bedroom does not mean you should. Besides, heavy buying and selling is most likely not filling your deposit, but the commission-account of your broker.

Some of the greatest investors do the exact opposite; they do almost nothing. Warren Buffett’s longtime business partner Charlie Munger once gave this immortal quote on the art of setting priorities:

“Assiduity is the ability to sit on your ass and do nothing until a great opportunity presents itself”

Wisdom united: 92-year old Charlie Munger (left) with Warren Buffett. 

Now, what priority would help an investor to avoid too much emotional buying and selling. One way is to focus on ‘systematic investing’.

I’d like to present a strategy you only have to trade once a year and enjoy life for the next 12 months without enduring the rollercoaster of daily market movements.

Welcome to the ‘Dogs of the Dow’

The strategy is to pick at the end of a year the 10 stocks of the Dow Jones Industrial Average with the highest dividend yield, the so called  ‘Dogs of the Dow’.

At the end of next year, you check the Dow Jones again, pick the new ‘dogs’ with the highest dividend yield and arrange your portfolio equally – 10 percent in weighting for each of the 10 ‘dogs’. Typically, you have to change about 4 out of 10 stocks each year.

What is a dividend yield and how is the calculation?

The dividend yield is the ratio in percent of the stock price and the dividend a company is paying out to investors in one year.

A stock at 80 of company who pays a dividend of 2 per share is our example. The ratio (80:2) is 40 that turns into a dividend yield (100:40) of 2,5%.

If the stock is sinking to 50 and the company maintains the dividend payout of 2, the new ratio of 25 turns into a dividend yield of 4%.

And with 4%, this company would be for sure a ‘Dog of the Dow’.

At the end of 2014, the following 10 Dow components had the highest dividend yield and became the ,Dogs of the Dow’ for 2015

Stock           Dividend Yield

AT&T                  5.48%

Verizon              4.70%

Chevron             3.82%

McDonald’s       3.63%

Pfizer                  3.60%

Gen.Electric      3.48%

Merck                 3.17%

Caterpillar          3.06%

ExxonMobil       2.99%

Coca-Cola          2.89%

 

Is this strategy really working?

Let’s have a look at the yearly performance in % of the ‘Dogs’ vs the entire Dow Jones since 2000:

Year    Dogs   Dow Jones

2014        7.0.          7.5

2013       30.3.       28.1

2012        5.7.          7.3

2011       12.2.        5.0

2010      15.5.       11.0

2009      12.9.       18.8

2008     -41.6.     -33.5

2007       -1.4.        6.4

2006       30.3.       19.1

2005       -5.1.        1.7

2004        4.4.         5.3

2003        28.7.       28.3

2002        -8.9       -15.0

2001        -4.9.       -5.4

2000         6.4.         -4.7

The Dogs-of-the-Dow-strategy is far from perfect (after more than 20 years of investing and observing the markets I haven’t heard of a perfect strategy, by the way) but it is a simple way to permanently own quality-stocks with upside price-potential and a high cash-dividend, particularly interesting in the current low interest environment.

You just have to turn the portfolio once a year, enjoy life or just, according to Charlie Munger ‘sit on your ass’.

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Another way to optimize your returns in the markets via systematic investing is the DCA-strategy. More on that coming up next: http://www.theleader.ro/stocks-strategy-ii/