Simple Gifts Result Of Beating The Dow

As the Shaker hymn says, “‘tis the gift to be simple.”

‘Tis also nicely profitable to be simple - as in using the Beating the Dow system of picking stocks. The method requires nothing beyond a pencil, scratchpad and the newspaper stock tables, yet in 1994, for the eighth time in the last 12 years, it beat the broad stockmarket averages.

As outlined in the book “Beating the Dow” ($10, HarperPerennial), the basic strategy is to buy an equal dollar amount of the 10 stocks with the highest dividend yields among the 30 stocks that make up the Dow Jones industrial average. (The yield is the annual dividend rate divided by the stock price.)

After buying the 10 stocks, sit tight for 12 months. Then sell any stocks that no longer are among the 10 highest-yielding Dow stocks. Replace them with issues new to the list.

The system is an automatically contrarian approach to investing. Stocks with relatively high dividend yields tend to be those out of favor with Wall Street. When such companies perform better than expected, their stock prices can rebound nicely.

In 1994, the basic 10-stock strategy produced a total return of 4.07 percent, not counting commission costs. That’s not stupendous, but it beat the 1.32 percent total return from the Standard & Poor’s 500 stock index. Since 1972, the method has beaten the S&P 500 by an average of about six percentage points a year, enough to outpace the S&P even after subtracting such real-world costs as brokerage commissions.

Most of the 1994 gains came from two chemical companies; Union Carbide Corp. and DuPont Co. In all, seven of the 10 Beating the Dow stocks provided profits in 1994.

For 1995, Union Carbide and Merck & Co. have been replaced on the list by Minnesota Mining & Manufacturing and Sears Roebuck & Co.

Those tempted to try the Beating the Dow strategies should decide how much they can afford to put at risk for several years. Neither the methods nor the market provides profits each year, and stock prices remain high by most yardsticks.

Those with as little as $1,000 to invest can try the 10-stock method by purchasing shares of Select 10 unit trusts managed by Merrill Lynch and sold by that firm and four others - Dean Witter, Prudential Securities, Smith Barney and PaineWebber.

There is a 1 percent sales charge for the trusts, which also charge an annual management fee equal to 1.75 percent of assets.