Member Services: 10 Year Stock Investment Plan

(Updated: January 5th, 2006)

This past year of 2004, the five Small Dogs of the Dow (SBC Communications, AT&T, JP Morgan Chase, General Electric, and ExxonMobile) managed to squeeze out an 12.4% gain compared to the Dow Jones Industrial average's nominal gain of only 3.1% - MORE THAN two-and-a-half times better!  It fails to make the 21% average gain we shoot for, but when you average in last years results it can be looked at in a different perspective.  I have kept last year's results for your review...

In 2003, I started off off the year with my Small Dog's: General Electric, Honeywell, JP Morgan Chase, SBC Communications, and AT&T.  As of yesterday's closing bell to end the year, these stocks soared +37% above and beyond my original investment. 

This strategy is not necessarily a secret, nor is it too well known - or practiced.  It involves acquiring high yielding stocks in AMERICA'S BEST COMPANIES and is commonly referred to as the Dogs of the Dow, and the Small Dogs (...of the Dow).

What are the "Dogs of the Dow?"

Of the 30 stocks that make up the Dow Jones Index, the 10 highest dividend yielding stocks at the end of any given year make up what is called the Dogs of the Dow.

What is the strategy?

When the stock market closes on the last trading day of the year, simply find the 10 stocks of the Dow 30 that have the highest dividend yields.  Then invest 10 equal amounts of money in each stock the very next trading day (on the open) and hold these 10 stocks for ONE FULL YEAR.  When the year has passed, re-evaluate the portfolio and "reshuffle" the stocks such that your account now has the new year's Dogs of the Dow.

...and the track record?

This simple strategy of investing in AMERICA'S BEST COMPANIES has made investors an average annual return of more than 17% since 1973 (As reported by U.S. News & World Report - July 8th, 1996).  This figure may not excite you at first glance, but since the overall Dow Jones Index has returned a little more than 12% average annual profits during this same time period, the Dogs should at least capture your attention.

What about the "Small Dogs?"

Of the 10 highest dividend yielding stocks, the five lowest priced stocks are known as the Small Dogs.  By investing five equal sums of cash into these five stocks, the Small Dogs have outperformed the (Big) Dogs with an average annual return of almost 21% since 1973 (U.S. News & World Report - July 8th, 1996).  A 21% average annual return should now capture your undivided attention because this kind of profit DOUBLES your investment every 3.4 years!

What plan can we make for ourselves with this information?

It is reassuring to know when I find myself in inevitable "dry spells" with my personal trading, that my investments in AMERICA'S BEST COMPANIES are helping to "pick up the slack."  Confident that my investments will double approximately every three-and-a-half years, I have a few ideas below to make the longer-term investment goal a reality:

Scenario #1) An investor has a $125K/$100K lump sum for the Small Dogs strategy.  By investing and "reshuffling" each year, this $125K one time investment would reach a $1,000,000.00 goal in approximately 10.5 years.  With $100K in less than 11.5 years.

Scenario #2) Another investor has $50K to invest in the Small Dogs, and adds $15K, $25,...or even $50K each year.  The $1,000,000.00 goal is easily attainable in a considerable less amount of time.

Scenario #3) In the real world, most people do NOT have $125K, $100K, or even $50K to "start" investing.  More investors, however, can start with a $25K investment. By investing and "reshuffling" at the end of each year, this $25K one time investment would reach a $1,000,000.00 goal in approximately 18.5 years.  That is not too long a time considering some employees are eligible to retire in "20 years," but I am communicating a "10-year" plan to motivate myself and others to reach a light in the not too distant tunnel.  Maybe even voluntary retirement!

Let's have this investor add $15K to the Small Dog portfolio each year. With an initial investment of $25K and adding $15K each year (that's a little more than a $1,000/month), the goal of $1,000,000.00 is reduced by less than one-half, but the required investment commitment is much more attainable for working class citizens...and enough for a reasonable retirement!  The $1M goal would have to wait another three years!

Scenario #4)  Create your own retirement plan.  The steps are simple:

1)  Find the estimated monthly income you will need to retire. (For example: $5,000/month)

2)  Multiply the estimated monthly income by 12 (months). ($5K/month x 12 mos. = $60K/year)

3)  Multiply the estimated yearly income by 4.77. ($60K x 4.77 = $286,200)

4) The final figure ($286,200) is the dollar amount you will need to have to retire and make a comfortable living from your investments that produce a minimum 21% average annual return.

With that being said...

Here are the Dogs of the Dow for 2006:

...still NOT satisfied with the idea of being a long-term investor in the stock market?

'Click' here for 72 Good Reasons to Stay Away from the Stock Market!

~ American Funds^® Mutual Fund Family ~

"This publication is strictly the opinion of its writer and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any funds or securities herein named. Information is obtained from sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.

© 2006, SCHAD Commodity Futures & Options Trading Corporation.  All rights reserved. 

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