"The new Dow strategy" outlined here is a method to pick a 10-stock portfolio to
outperform both the Dow 30 and the well-known Dow dividend strategy. Take a look.
by Paul and Carole Huebotter
Economists maintain that the markets are too efficient for any trading system to regularly outperform, say,
the 30 stocks that make up the Dow Jones Industrial Average (DJIA) or the Standard & Poor's 500 index. We
disagree. Here's one that not only theoretically should, but does. The system, to which we refer as the new
Dow strategy , is akin to the well-known Dow dividend strategy, which used to work well but has faltered
considerably in the past decade. When the DJIA was mainly a collection of large cyclical-company stocks
paying similar yields when averaged over the entire business cycle, investing in the top 10 yielders made
sense. But the stock substitutions - 10 in the last 17 years - have transformed the DJIA into a hybrid group
often dominated by growth companies.
For example, the three energy giants - Chevron [CHV], Exxon [XON] and Texaco [TX] - are always in the
Dow dividend portfolio, but their performance doesn't usually merit such loyalty. On the other hand, the
low-yielding newcomers, such as McDonald's [MCD], Coca-Cola [KO] and Disney [DIS], never make the top 10. The symmetry of the DJIA has gradually eroded. As a result, the Dow dividend strategy has had an
average annual return only 1% better than the DJIA since 1985, a far cry from the system's glory days of the
1970s and early 1980s.