StreetWise: No investing Holy Grail, but Dow method reliable

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You do not need professional advice or specialized computer software or expensive newsletters and whatever else is being touted by those claiming to have an "inside track" to the Holy Grail of investing, that flawless method for deciding what to buy and when.

Not only is there is no Holy Grail, there should never be even a hint of a guarantee as to an investment's performance. Yet, for some the search has become an obsession, while for others it is a hopeless crusade. In either case, their frustration leaves them vulnerable to the vultures that prey on the uninformed.

Nonetheless, there is one method anyone can use to build a decent portfolio -- in a period of about 20 minutes. Your total commission cost -- using a discount brokerage house -- should not exceed $45, and you do not have to look at your portfolio for a year.

Developed by money manager Michael O'Higgins, this often maligned methodology is referred to as the Dow Five theory or Small Dogs of the Dow. It was originally described in his book "Beating the Dow," (Harper Collins Publishers, 1991 and since revised). The strategy limits your horizon of possible investment candidates to the 30 companies that make up the Dow Jones industrial average.

The theory consists of selecting the five lowest priced of the Dow's 30 stocks from the 10 with the highest dividend yield. You buy an equal dollar amount, not an equal number of shares, of each of these five companies and hold the shares for one year.

On the anniversary of your purchase, you again identify the five lowest-priced stocks out of the 10 with the highest yield and adjust your portfolio accordingly. Using a Dogs of the Dow mutual fund defeats the low cost part of the strategy.

By implementing the strategy, you become a contrarian investor. In terms of 2012 performance, the Dow Five registered a total return of 10.39 percent, while the S&P 500 index chalked up 16 percent.

Does the Dow Five theory work every year? No, of course not.

Still, for 2011 the return was 19.2 percent, as opposed to 2.1 percent for S&P 500. The Dow Five three-year average return is 18 percent as compared to 14.5 for the S&P 500.

Your year can start anytime. If you should decide to begin now, the list is: AT&T, Microsoft, Pfizer, General Electric and Intel. The combined average dividend yield is 3.88 percent. For additional information, see Dogsofthedow.com.

bizopinion

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com


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