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stable52 (< 20)

Is the Dow dividend 2-2-3-4-5 strategy still valid?



November 01, 2013 – Comments (2) | RELATED TICKERS: T , PFE , MSFT

I just read the Motley Fool Investment Guide published in the mid-90s where they suggest what seems to be a winning strategy for beating the Dow. Select the top 10 yielding Dow stocks, rank them according to stock price then create a portfolio using equal dollar amounts invested into the five cheapest stocks from this group. For even better returns, it was suggested deleting the cheapest stock and doubling up on #2 (hence 2-2-3-4-5). After one year and at each anniversary afterwards, cash out then repeat the strategy with the current cheapest Dow high yielders. In the book, this strategy was backtested 20 years and found to achieve a 25% pa average return from 1973-1993. My question is: Has this strategy been backtested more recently and is it still a valid investing method today? I am planning to invest a significant part of my portfolio in the Dow dividend stocks following this strategy but thought I'd better get an update first from the Foolish community. Any thoughts?

2 Comments – Post Your Own

#1) On November 01, 2013 at 8:19 PM, HarryCaraysGhost (87.66) wrote:

Hmnn, interesting question.

Did a check of what the starting profile would look like according to-

INTC,PFE,MSFT,T. CSCO got left out. Thanks I'll start a watchlist of these stocks, and update it yearly.

I don't have an easy way to backtest this theory so someone else will have to chime in.

Just looking at the port I would say that yeah, it has a margin of safety around it that would perform well in bear markets, and act  as a widows and orphans during bull markets whilst delivering out the yield.


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#2) On November 01, 2013 at 10:02 PM, constructive (99.96) wrote:

I just backtested it on

Annualized return over the last 15 years:

Dogs of the Dow       5.8% 
Foolish 5                  4.8% 
S&P 500                  2.4% 
Foolish 4                  1.1% 

I would not recommend using any of these simplistic mechanical strategies. In the 2000s they lost a lot of money on easily avoidable low quality companies like Kodak and GM.

If I remember correctly, TMF gave up on the Foolish Four/Five within a few years of publishing that book. 

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